Is It Time for Required Environmental Disclosure?
In recent years, there has been a groundswell of new support for requirements that publicly traded companies in the U.S. regularly report their environmental practices and performance. In practice, in most companies disclosure covers multiple issues under the rubric of sustainability or combined environmental, social, and governance (ESG) reporting. Interestingly, much of the momentum during the past several years has been provided by large institutional investors, e.g., public pension funds. As shown in some of our recent work, European industry, capital markets, and governments seem, to be further along this path than their counterparts in the U.S. One important and long-standing barrier to requiring fuller ESG disclosure has been concerns about the limits placed on institutional investor behavior by the notions of “fiduciary duty,” which traditionally has been interpreted as meaning that investors managing money on behalf of others must place financial returns above all other considerations (e.g., improved environmental performance).
This traditional view was strongly challenged in a breakthrough study prepared for the United Nations Environment Programme Finance Initiative (UNEP-FI). This study, widely known as the “Freshfields” report after the international law firm that prepared it, has been widely credited with beginning to turn around the conventional wisdom on the acceptability/suitability of of selecting financial securities on the basis of company environmental or other characteristics. The authors concluded that, to varying degrees, considering ESG factors was permissible in all the major capital markets under study, and arguably, might be required in some.
Earlier this month, UNEP-FI released the long-awaiting follow-up to its original study, which can be downloaded here:http://www.unepfi.org/fileadmin/documents/fiduciaryII.pdf. The findings of this report extend those of the earlier work, and its authors now take the position that consideration of environmental, social, and governance issues in investment analysis and decision making is not simply permissible but is required. The report further concludes that investment managers who fail to do so may be vulnerable to being successfully sued for negligence!
Interestingly, the U.S. Securities and Exchange Commission (SEC) has recent formed a new Investment Advisory Committee, which may feature a defined subcommittee to study and offer recommendations specifically on the issue of sustainability/ESG reporting and potential new required disclosures. The initial meeting occurred in late July, with future meetings tentatively scheduled for October and February 2010. In the meantime, stay tuned.
So the questions that come to mind include, Should ESG disclosure be required? If so, from whom, at what intervals, using what methods? Note that the Social Investment Forum has formally requested that SEC mandate use of the Global Reporting Initiative’s G-3 reporting guidelines (and compliance with the “A-plus” level of reporting). Might there be a better approach? What level of detail and rigor should be required? To what extent should SEC mandate inclusion of ESG considerations in the standard Annual Report and 10-K filings of companies (e.g., to include major performance data, prominent discussion in the Management Discussion & Analysis section).
If you care to share any thoughts, new information, or suggestions, we’d love to hear them. This could be a very interesting topic for anyone who would like to see a quantum leap in environmental protection efforts in this country.
12 Comments August 6, 2009