Statements by the SEC’s Investor Advisory Committee and Asset Management Advisory Committee point to the growing need for action on ESG.

By Paul A. Davies, Paul M. Dudek, and Kristina S. Wyatt

Recommendations of the Investor Advisory Committee

“The use of ESG-related disclosures has gone from a fringe concept to a mainstream, global investment and geopolitical priority.”

The Investor Advisory Committee was established under the Dodd-Frank Act to advise the SEC on its regulatory priorities, the effectiveness of disclosure, investor protection, and other interests. It reflects a cross section of market participants, including investor groups, academics, think tanks, former regulators, and investment managers. The committee has engaged with a variety of market participants that have consistently reinforced the message that ESG factors are material to investors, regardless of the issuer’s sector or geography. Yet, it reported, “despite a plethora of data, there is a lack of material, comparable, consistent information available upon which to base some of these decisions.” According to the committee, a “patchwork” approach has created fertile ground for third-party rating systems that seek to fill the informational voids left by companies’ inconsistent and sometimes inadequate disclosures. The proliferation of ratings providers, each using different standards and criteria and asking companies for different information, has resulted in companies being inundated with questionnaires and requests for information. The ratings that yield from this process frequently lack transparency and consistency as to their methodologies. The committee concluded, “Despite a great deal of information being in the mix, there is a lack of consistent, comparable, material information in the marketplace and everyone is frustrated — issuers, investors, and regulators.”[3]