Posted on Thursday, March 11, 2021

The Securities and Exchange Commission (SEC) today published a speech from Acting Director of the Division of Corporation Finance John Coates on “ESG Disclosures –  Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets” in which he addressed the relevance of ESG disclosures. Below are excerpts from his speech:

On Considerations for an effective ESG Disclosure System:

The SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. It means thoughtful engagement by trusted specialists seeking consensus among investors and companies about useful, reliable and comparable disclosures under standards flexible enough to remain relevant. A process to create such standards is not likely to be simple, quick or easy. Important and challenging questions must be addressed, such as:

  • 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?

On Costs of NO ESG Disclosure Requirements:

Companies face higher costs in responding to investor demand for ESG information because there is no consensus ESG disclosure system. Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. These higher costs can be particularly burdensome for smaller and more capital constrained companies, and yet if these companies do not provide ESG disclosures, they risk higher costs of capital.

On Mandatory versus Voluntary:

As we think about structuring a disclosure system for ESG issues, one question that comes up is whether ESG disclosures should be the subject of mandatory versus voluntary disclosure provisions. People often think of mandatory disclosure in a way that suggests that there is nothing more than an on/off switch between mandatory and voluntary disclosure. Our existing disclosure regime, however, is already more nuanced than that, and there is no reason an ESG disclosure system would need to be less nuanced. 

On a Single Global ESG Reporting Framework:

On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets…Establishing a global framework, however, is complex and raises a number of considerations… the SEC can and should play a leading role in the development of a baseline global framework that each jurisdiction can build upon to address its individual needs.

Read the full speech.