Toward a sustainable economy

Jay OwenReforming Global Finance, Beyond GDP

Executive Summary

Investors, the public, and regulators must be informed and empowered to address the great challenges facing our companies, our country, and the world. Information and transparency are essential.
The federal securities laws administered by the Securities and Exchange Commission (SEC) have brought a level of transparency to U.S. public markets for over eighty years. Yet, our world has changed in that time. Whether these issues are climate change, human rights, tax, political spending, or workforce matters; investors and the public are increasingly demanding transparency on a wider range of environmental, social, and governance (ESG) issues than ever before. Fortunately, modern technologies permit stakeholders to process far more information than ever before. Yet despite this demand for more information, and the increased capabilities of investors to utilize it, the SEC has nevertheless declined to meaningfully update its ESG disclosure requirements for decades.1
Change is occurring, though. On the one hand, an array of private efforts to obtain additional information on ESG matters, combined with a growing desire among some corporations to engage in sustainable and responsible practices, has resulted in diverse new channels for the dissemination of ESG information.2 Albeit, this information is not standardized, balanced, complete, even sometimes reliable. Yet these trends show that some corporations have already put in processes to collect and disseminate a range of ESG disclosures.
At the same time, increasing investor interest, growing business complexity, more active public pressure, and other factors have spurred a growth in the volume of disclosure documents. Annual filings that were once dozens of pages may now be hundreds of pages long. Some of this growth relates to ESG issues. But much of the new volume of disclosure has not resulted in more or better information. Instead, many disclosures lack specificity, metrics, and standards, and are not readily comparable across companies, much less industries. Boilerplate language is common.3
Unsurprisingly, all sides are frustrated. Companies and their service providers highlight the costs of sprawling disclosure documents and question the utility of them. Investors and the public simultaneously highlight how the patchwork of disclosures means they are still not receiving the information they need.
We can all do better.
Investors and the public would benefit from more and better disclosures to make informed decisions. Companies and their service providers would appreciate a standardized process with a more level playing field. Stakeholders on all sides have pressed the SEC to step into the void.
After taking the helm of the SEC in 2013, Chair Mary Jo White began what has subsequently come to be called the “Disclosure Effectiveness” Initiative to identify and reform corporate disclosure requirements. Since early 2014, the SEC has openly sought public comments on what it should do, and over 9,835 commenters have responded with their thoughts.4
Two years after it formally kicked off its “Disclosure Effectiveness” review, on April 13, 2016, the SEC issued a Concept Release on whether and how it should change its core disclosure rules.5 In that Concept Release, the SEC asked for public feedback on the frequency and formats of companies’ disclosures, accounting practices and standards, and the substantive areas that should be disclosed, including a section on sustainability. This report briefly walks through the purpose of the Concept Release and the public response to it.
The overwhelming response to the Concept Release seems to reflect an enormous pent up demand by disclosure recipients for more and better disclosure. As of August 16, 2016, the SEC had received 26,512 comments in response to its Concept Release.6 By way of comparison, of the 161 major proposals by the SEC since 2008, only six (less than 4 percent) have received more than 25,000 comments.7 In fact, the median number of comments received during this period was just forty-five. The existence of this broad public engagement, including through two public campaigns, is meaningful in showing significant public interest in what many might consider an obscure regulatory topic.8
Commenters expressed clear support for expanded and enhanced disclosures. Support came from a wide range of sources: institutional investment managers, individual investors, public pension funds, research analysts, public interest advocates, individual members of the public, academics, trade associations, standards setting organizations, accountants, members of Congress, and even other government entities. Overall, these commenters tended to be the recipients of companies’ disclosures, those the SEC is institutionally charged to protect. A handful of commenters called for “streamlining” or eliminating disclosures. These commenters were a small handful of companies,9 professional services providers10 or associations representing companies.11 Not representative of the growing consensus around sustainable corporate practices, these commenters were notable for their connections to a small handful of industries, such as oil and gas, chemicals, financial services, and insurance. These commenters generally tend to be the parties making the disclosures or their representatives.12
Some of the most-discussed substantive areas raised by commenters included disclosures related to:

  •  taxes, which were discussed in 26,287 comments;
  •  environmental/climate change, which were discussed in 10,113 comments;
  •  political spending, which was discussed in 9,994 comments;
  •  human capital and workforce issues, which were discussed in 48 comments;
  •  human rights, which was discussed in 46 comments; and
  • financial stability risks, in particular from derivatives, which were discussed in 20 comments.

Clearly, these issues were important to commenters. In this report, a wide range of organizations focused on empowering investors, improving the economy, and advancing the public interest come together with those thousands of commenters to call on the SEC to modernize its rules. Investors, the public, and regulators need more information about what their companies are doing, and standardization is critical. By modernizing its rules, the SEC can better fulfill its mission and mandate through better aligning the financial markets incentives with the long-term public interest on which our economy, our country, and our world depend.
For the full report click here