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SEC, Lawmakers, and Investors Request ESG Transparency

Image courtesy of Aditya Vyas

Efforts to bring more transparency to corporate Environmental, Social, and Governance (ESG) initiatives have picked up steam in recent weeks, with U.S. lawmakers, regulators and investors calling for more significant disclosures on issues like climate change and diversity.

On June 16, the U.S. House passed legislation that would require publicly traded companies to report ESG metrics. The measure, which squeaked by on a 215-214 vote, marked the first time the House has passed sweeping legislation for transparency on sustainability issues. According to Roll Call , the package of bills would require broad disclosure of ESG metrics and also dictate specific reporting expectations on climate risks, political spending, CEO pay and taxation rates.

That legislation came during the same week that Caroline A. Crenshaw, Commissioner of the Securities and Exchange Commission (SEC), urged greater ESG disclosure for both issuers and asset managers. Crenshaw’s statement came amid requests by investor groups that the SEC demand more corporate disclosures on climate change and other ESG issues.

The SEC has been especially busy on the ESG front. The commission recently announced a series of initiatives designed to put a bigger focus on ESG issues, with plans to develop a framework that will address ESG disclosures. SEC Chairman Gary Gensler called ESG disclosure “top priority.”

Crenshaw offered more clarity in a June podcast with the Security Traders Association, saying the SEC should work to ensure that investors have access to information that is “decision-useful,” meaning it is complete, comparable and reliable. To demonstrate how important ESG is to investors, she pointed to recent moves by Exxon’s board and Duke Energy shareholders to require more detailed disclosures on political spending.

Meanwhile, the House package will create “clear, consistent disclosure standards for issuers and finally provide investors and our markets with the information they need to make the best investment decisions possible and to hold the companies they’re invested in accountable,” House Financial Services Chairwoman Maxine Waters (CA) said during a Rules Committee meeting on the measure.

ESG disclosures have been a hot topic in the investment community of late. As noted by the Responsible Investor website back in December, there has been a fundamental shift in how investors view corporate responsibility.

Until recently, investors had relied on ESG ratings produced by third-party providers as the primary input for their ESG decision-making. But now, many investors believe a greater emphasis should be put on underlying company data regarding ESG, mainly because different third-party providers might consider different factors and assign different values to them. As Responsible Investor put it: “If ESG data is to be used effectively to support investment decision-making, it must be comprehensive, granular, timely, and properly normalized.”

One option is to use ICE ESG Reference Data developed through a collaboration between Intercontinental Exchange (ICE) and Bank of America Global Research. ICE ESG Reference Data looks to address the issue of ESG data in three ways:

  1. By providing raw data detailing ESG attributes and indicators about publicly traded companies in a standardized format. The aim is to give investors greater transparency into the impact of key ESG issues, as well as to uncover ESG opportunities and manage risk. The data is sourced from company reports and supplemented with data from publicly available third-party sources.
  2. Presenting a quantitative assessment of a company’s relative ESG performance so users will have another reference point for analysis.
  3. Offering risk data for ESG analysis through a partnership with RepRisk, an ESG data science firm that combines artificial intelligence and human capabilities to develop comprehensive ESG risk data sets. The focus here will be on ESG risk factors that might impact a company’s financial performance, such as exposure to child labor, corruption and fraud. This data comes entirely from independent sources as a way to provide a counter-weight to company-reported information.
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