In a recent speech, SEC Commissioner Roisman shared his own views regarding ESG disclosures. The Commissioner touched on the difficulty associated with defining “ESG.” Specifically, he noted that corporate governance perhaps should be considered separately from the “E” and “S”. The Commissioner also noted that there is an element of subjectivity associated with the issues that fit under the broad ESG rubric, and this subjectivity poses a challenge especially when considering whether to mandate prescriptive disclosure on ESG. The Commissioner acknowledged the recommendations of the Investor Advisory Committee on these disclosures. Quite appropriately, I think, the Commissioner noted that often discussions regarding ESG matters take on a political or moralistic tone. In this regard, Commissioner Roisman commented, “It is too easy to fall into the trap of categorizing people in ways that obviate the need to address the substance and merits of ESG issues. But, this makes policy discussions turn personal and almost always less productive.” Commissioner Roisman noted that, personally, he did not favor mandating prescriptive disclosures in this area. He focused on the materiality standard, which has guided all disclosure requirements. To the extent ESG issues are material to a reporting company, the principles-based disclosure framework would require that the company make necessary disclosures. He touched on a few examples of instances in which Congress has mandated that the SEC require that public companies make certain disclosures, such as the disclosures mandated for resource extraction issuers, and the many challenges that such SEC rules subsequently faced. So while the Commissioner clearly does not personally favor prescriptive ESG disclosures for public companies, and would let the principles-based disclosure framework continue to guide issuer disclosures of policies or developments material to an issuer, the Commissioner explained he does favor additional regulation for asset managers.
For asset managers that make claims regarding their use of ESG metrics to drive investment decisions, or that tie returns to ESG related investment strategies, additional disclosures in may be necessary. Funds, for example, should more clearly define the use of terms like “sustainable,” “green,” etc., since there are no uniform definitions or common understandings related to ESG related terminology so that retail investors can form a better understanding of the potential or actual investments, as well as the degree to which social impact may be prioritized over financial returns. Commissioner Roisman notes: “it would make sense to me that asset managers who want to use these terms to name their funds or advertise their products should be required to explain to investors what they mean.” See the full text of the Commissioner’s remarks here.