Yesterday, John Coates, the acting director of the SEC’s Division of Corporation Finance, announced a proposed framework for considering new ESG disclosure requirements, recognizing that while the scope of ESG issues is very broad, specific ESG issues affect particular companies differently based on industry, geography and other factors.
Need for “adaptive and innovative” policy
Coates compared ESG issues to asbestos-related risks, which evolved from invisible “non-financial” risks that were not addressed in SEC filings to visible and eventually clear financial risks that were increasingly disclosed in companies’ filings. He believes that SEC policy needs to be adaptive and innovative and, for example, respond to climate risks that were formerly peripheral and now have greater significance.
Effective ESG disclosure system
Coates believes some of the questions the SEC should consider include:
- What disclosures are most useful?
- What is the right balance between principles and metrics?
- How much standardization can be achieved across industries?
- How and when should standards evolve?
- What is the best way to verify or provide assurance about disclosures?
- Where and how should disclosures be globally comparable?
- Where and how can disclosures be aligned with information companies already use to make decisions?
Costs from having no ESG requirements
Although recognizing that disclosure requirements impose costs on companies, Coates believes that failing to establish ESG requirements is itself costly – that the lack of consistent, comparable and reliable ESG data discourages investment and voting decisions. Companies incur higher costs in responding to multiple, conflicting or redundant investor