United States: SEC Commissioner Roisman Shares "Serious Reservations" About Mandating ESG Disclosures

SEC Commissioner Elad L. Roisman expressed "serious reservations" about mandating environmental, social and governance ("ESG") disclosures by public companies.

In a speech at the Society for Corporate Governance National Conference, Mr. Roisman emphasized (i) the lack of consensus regarding the definition of "ESG" and (ii) that the linkage between issues of corporate governance and other environmental or social issues is fairly tenuous.

ESG Mandates

Mr. Roisman stated that prescriptive disclosure requirements would be difficult to implement. He highlighted (i) issues typically falling within the scope of ESG disclosures that are largely subjective and ever-evolving based on current events. and (ii) the tendency for individuals to "blur" their personal views on environmental and social issues with their views as to federal disclosure requirements.

Material Disclosures by Public Companies

Mr. Roisman made clear that while the SEC's principles-based framework requires a public company to disclose all material information (ESG or otherwise), a company can tailor disclosures so that they are useful to investors. He also pointed out that the liability facing public companies in the event of material misstatements and omissions should incentivize public companies to disclose ESG issues to the extent they are material.

Asset Managers and ESG Disclosures

Mr. Roisman observed that many asset managers have asked for specific ESG disclosure requirements and may attribute their investment decisions to ESG metrics. According to Mr. Roisman, the obligation of making ESG disclosures may be better put on asset managers rather than on issuers.

That is, Mr. Roisman expressed some doubt as to how ESG information is actually used. He identified several risks, such as whether asset managers are (i) choosing to prioritize environmental or social goals over a fund's economic returns for their investors or (ii) creating a false impression for investors that a product is environmentally friendly (a/k/a "greenwashing"). To remedy some of these issues, Mr. Roisman called for mandates that require asset managers to define terms such as "green" or "sustainable" in order for investors to have the information necessary to properly inform their decisions as to hiring an investment manager.

Commentary Steven Lofchie

Commissioner Roisman's remarks on mandating ESG disclosures by investment advisers are a perfect example of the concept of "turnabout is fair play." See  GAO Surveys Institutional Investors on ESG Disclosures. That is, advisers who want more information from the issuers in which they may potentially invest are also subject to the obligation themselves to provide more information as to the manner in which they make investment decisions.

This is not in the least to criticize the concept that advisers may market themselves as investing in a manner that they view as socially conscious. But if they do so, they should be explicit as to (i) how they define being socially conscious, (ii) how they assure that their investments conform to their definitions and (iii) whether, and how much, they are willing to sacrifice investment returns to be socially conscious.

Originally published July 08, 2020.

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