April 23, 2021
With long-term financial returns as a building block for sound investment strategies and sustainability a cornerstone for better posterity, combining the two makes for a timely and symbiotic panacea.
I commend the SEC for taking this initial step to remedy inconsistent reporting on climate and providing investors with more transparent information to facilitate their analysis of ESG risk factors. A standardized framework would minimize subjectivity in interpreting disclosures and the practice of greenwashing.
I recommend that the commission look beyond environmental factors (climate change, pollution, resource depletion etc.) and include social and governance factors in the framework of disclosures. From a social issues perspective, companies should make disclosures on working conditions, employee relations, and human rights. They should additionally include information on board diversity and structure, political lobbying and donations, bribery and corruption. All these factors can significantly impact the risk, volatility, and returns of securities and markets.
There is ample evidence that climate change is a significant threat to our planet and its ecosystems. There is also no reason to wait for disaster (financial and/or planetary) to strike before taking action. The 1933 securities act that required public companies to disclose material information necessary for investors to make informed decisions came in the wake of the 1929 stock market crash. Some of the key elements that led to the crash (i.e. a lack of transparency in disclosures and misrepresentation of activities) are directly relevant to ESG risks today.
By mandating standardized disclosures, the SEC would be joining other regulators worldwide that have already taken concrete steps in this vein. The first level of the EU Sustainable Finance Disclosure Regulation (SFDR) enacted in March 2021 requires companies to disclose information about policies implemented and actions taken vis-a-vis sustainability risks.
Publicly listed companies are already accustomed to providing required standardized financial disclosures. The SEC should make ESG risk factor disclosures mandatory akin to other financial disclosures.
By taking meaningful action on ESG disclosures, the SEC would be assuming its responsibilities and carrying out its duties to protect investors and the integrity of capital markets.