On June 23, 2020, Jay Clayton, Chairman of the US Securities and Exchange Commission (SEC) discussed his perspectives on long-term investing, sustainability and the role of disclosures during a webinar hosted by FCLTGlobal, a non-profit organization that develops research and tools that encourage long-term investing and business decision-making.
While environmental, social and governance (ESG) matters are grouped by some into a single category, Chairman Clayton reiterated his view “E,” “S” and “G” matters are different and lumping them together into one score diminishes their usefulness. Chairman Clayton recognizes companies may have significant E or S or G issues that are various in nature. He believes it is important to understand how management looks at these issues and encourages dialogue between companies and investors on these topics.
According to Chairman Clayton, efforts to combine metrics that include subjectivity, especially when preferences are added in, create imprecision. He sees this as a substantial limitation in using a single point ESG ratings score. Chairman Clayton is an advocate of principles-based disclosure that is flexible enough to apply to many different types of situations, including those encompassed within the ESG concept. According to Chairman Clayton, materiality for disclosure purposes should be built around what is material to a reasonable investor, which could include qualitative, quantitative, financial or non-financial metrics.
The SEC’s principles-based disclosure framework allows the SEC to issue targeted guidance as circumstances warrant. Chairman Clayton noted that the SEC has already provided guidance in the environmental area and indicated that at some point in the future that guidance may be updated. He stated that social matters raise different concerns and pointed to SEC guidance addressing disclosure of self-identified diversity characteristics that a board or nominating committee has considered in determining whether to recommend a person for board membership as an example of an SEC response to social disclosure.
Chairman Clayton observed that to the extent disclosure is forward-looking, as often the case with respect to environmental matters, it is more difficult to audit. However, this does not mean that such disclosures receive a “free pass.” According to Chairman Clayton, such disclosures have to be based on good faith estimates, consistent with how management looks at the issues. Chairman Clayton stated that he is open to dialogue in the area of sustainability to encourage use of the forward-looking safe harbors to get more information to investors.
With respect to balancing liquidity and long-term investing, Chairman Clayton observed that liquidity is important even to long-term investors and that long-term investors are important to the economy. He believes that managing a company for quarterly guidance does not provide a healthy perspective for the long term. However, even if changes are made in the area of quarterly guidance, Chairman Clayton recognizes that investors will be thirsting for current information and sees a continuing need for some monthly or quarterly check in from the company.