GAO surveyed institutional investors on environmental, social and governmental ("ESG") disclosures. GAO reviewed ESG disclosures made by 32 companies to study (i) the reason for investors' interest in ESG disclosures, (ii) how public companies approach such disclosures, and (iii) the benefits and drawbacks of voluntary versus mandatory disclosures.

GAO reported that institutional investors overwhelmingly stated that they seek ESG disclosures to (i) become more aware of potential risks to the financial performance of a company, and (ii) inform their decisions in shareholder meetings and when making stock purchases. Additionally, GAO found that the most disclosed ESG factor in its survey was board accountability, while the least disclosed factor was human rights. GAO also identified substantial variation in the ESG disclosure methods in its sample group, partly citing it as a result of the SEC's "principles-based" approach to ESG disclosure requirements.

GAO also analyzed the advantages and disadvantages of mandatory versus voluntary disclosures:

  • Mandatory Disclosures. GAO stated that the SEC's adoption of an ESG disclosure framework would provide comparability of information across companies. However, GAO recognized that a shortcoming of such a regulatory framework is that there is not a consensus among companies regarding what information should be disclosed. An approach that could address this shortcoming is issue-specific rulemaking regarding ESG disclosures, but GAO found that this presented weaknesses in the form of (i) becoming outdated over time, and (ii) the reduction of flexibility for company disclosures.
  • Voluntary Approaches. GAO found that some investors, companies, and market consumers viewed voluntary approaches to ESG disclosures favorably due to their flexibility. GAO noted that these approaches fail to address the lack of (i) industry consensus on ESG disclosure requirements and (ii) consistency in types of ESG disclosures.

Commentary Steven Lofchie

ESG is an amorphous term. It can include everything from climate change to employee satisfaction to the conduct of whistleblower programs to information security programs, and numerous other related and unrelated issues. For GAO's study to be meaningful, it should have asked investors what specific topics they wanted information on, why they wanted that specific information, and how they currently use information of that sort in making decisions. Ideally, GAO might also ask how much investors would be willing to pay for the information or how much they thought issuers should reasonably spend on providing it.

Originally published July 07, 2020.

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