The Security Exchange Commission (SEC) recently solicited comments on how publicly traded companies should report environmental, social and governance (ESG) commitments to shareholders. This issue has received significant attention recently as large private equity firms, pension funds and other large shareholder organizations have begun to demand more thorough reporting on ESG risk and opportunities confronting companies striving to enhance stewardship.
The National Association of Manufacturers (NAM) this week filed comments with the SEC on its proposed ESG reporting criteria from the manufacturing industry’s perspective. NAM included the following set of principles to help ensure SEC does not impose criteria that is overreaching and costly to businesses:
- Materiality: Companies should be required to disclose information only if it is company-specific, relevant, useful information that would change a reasonable investor’s view of a company.
- Flexibility: Different items are material for different companies. Disclosures should not be one-size-fits all, but should instead include the kind of company-specific information that will reflect the diversity of risks and opportunities that businesses face and thus be useful to investors.
- Clarity and comparability: The current lack of standardization can create costs and uncertainty for both companies and investors. Within a flexible, materiality-driven framework, the SEC can enhance the clarity and comparability of climate and ESG information disclosed by businesses.
- Limiting company costs and liability: New SEC mandates should not overburden companies with high costs or a strict liability burden—both of which could result in limited or boilerplate reporting that isn’t useful to investors. Many of companies’ climate and ESG goals are aspirational and rely on evolving reporting methodologies, and the SEC shouldn’t disincentivize aggressive goal-setting on these issues.
- Appropriate scope and reasonable timelines: The data the SEC is describing isn’t just sitting on the shelf. In order to disclose climate and ESG information under a new framework, many companies could have to build out data collection infrastructure, go deep into the supply chain, and get information through standardized methodologies that may not currently exist. This process will be time-consuming and difficult, and the SEC will need to tailor any requirements accordingly and give companies time to adapt.
- Do not reinvent the wheel: Many companies are already disclosing climate and ESG information based on existing methodologies, and there are plenty of third-party standards for reporting this data. Rather than starting from scratch, any SEC framework should align with existing practices that many companies are already using.