SEC official: Companies avoiding ESG disclosures risk higher costs of capital

By Jim Tyson for CFODIVE.com

Dive Brief:

• Although disclosures on environmental, social and governance (ESG) issues pose preparation costs, companies that forgo such reports risk facing higher costs of capital, according to John Coates, acting director for the Division of Corporation Finance at the Securities and Exchange Commission (SEC). 

• Many ESG-related issues are similar to risks that evolved from "invisible to visible to extremely clear, and clearly financial," Coates said in a March 11 statement, noting how asbestos hazards eventually became an essential topic for company disclosure.

• "Arguments in favor of a single global ESG reporting framework are persuasive," Coates said, adding that the SEC "should play a leading role" in creating such standards.

Dive Insight:

Coates' remarks follow the SEC's recent moves towards sharpening its focus on ESG risks and companies' disclosure responsibilities. The federal government currently does not require companies to provide public ESG reports.

Acting SEC Chair Allison Herren Lee in a Feb. 24 statement directed the Division of Corporation Finance to "enhance its focus on climate-related disclosure in public company filings."

"Now more than ever, investors are considering climate-related issues when making their investment decisions," she said. "It is our responsibility to ensure that they have access to material information when planning for their financial future."

On March 3, the SEC Division of Examinations mentioned climate-related risks first in its description of priorities for 2021, and Lee said that the SEC is "integrating climate and ESG considerations into the agency's broader regulatory framework."

Among its efforts, the SEC will examine proxy voting practices "to ensure voting aligns with investors' best interests and expectations" and companies' "business continuity plans in light of intensifying physical risks associated with climate change," Lee said.

The following day, the Enforcement Division announced the creation of a Climate and ESG Task Force made up of 22 members from SEC headquarters, including the Office of the Whistleblower, as well as regional offices and "specialized units" within the division.

"Consistent with increasing investor focus and reliance on climate and ESG-related disclosures," the task force "will develop initiatives to proactively identify ESG-related misconduct," the SEC said in a press release.

On the same day — March 4 — the SEC's two Republican commissioners released a statement rhetorically asking whether the recent SEC "announcements represent a change from current commission practices or a continuation of the status quo with a new public relations twist? Time will tell."

"We assume that the new initiative is simply a continuation of the work the staff has been doing for more than a decade and not a program to assess public filers' disclosure against any new standards," Commissioners Hester Peirce and Elad Roisman said.

Companies also face pressure from investors and lenders to release regular detailed reports on the sustainability of their business.

BlackRock CEO Larry Fink in January encouraged businesses to move forward with disclosures. "Because better sustainability disclosures are in companies' as well as investors' own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them," he said in a statement.

Investors currently lack "consistent, comparable and reliable ESG information" needed for making "informed investment and voting decisions," Coates said. "Investments are being held back in the absence of that information."

Lacking a consensus-based system for disclosure, companies face high costs when answering conflicting and redundant requests for ESG information from investors, Coates said.

"These higher costs can be particularly burdensome for smaller and more capital-constrained companies, and yet if these companies do not provide ESG disclosures, they risk higher costs of capital," he said. In a footnote, the SEC said Coates's statement represented his own views and "does not alter or amend applicable law."

ESG metric usage is growing. The proportion of companies reporting on their operational sustainability rose to 80% in 2020 from 75% in 2019, according to a KPMG survey.

Several groups are pushing for the adoption of different ESG reporting standards, complicating efforts by companies to achieve uniformity and ensure buy-in by stakeholders. The organizations include the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD).