While the investor community continues to call for more useful ESG disclosures, some regulators try to put on the brakes.
By Paul A. Davies, Paul M. Dudek, and Kristina S. Wyatt
Calls for Improved ESG Disclosures
Many in the investor community have spoken out about their desire for more comparable, decision-useful environmental, social and governance (ESG) information to help inform investment decisions. The year 2020 rang in with Larry Fink’s now famous letter to CEOs in which he declared “we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.” At roughly the same time, State Street Global Advisors issued its annual CEO’s letter in which it emphasized that “addressing material ESG issues is good business practice and essential to a company’s long-term financial performance — a matter of value, not values.” Also in January 2020, the International Business Council of the World Economic Forum issued a consultation draft calling for the development of common, consistent ESG reporting metrics to bring order and consistency to the ESG reporting landscape. The consultation draft was intended to address the “lack of consistency by which companies measure and report to investors and other stakeholders the shared and sustainable value they create.”
In January 2020, BlackRock CEO Larry Fink circulated his annual letter to CEOs in which he noted, “I believe we are on the edge of a fundamental reshaping of finance”. His letter put companies on notice that climate risk and improved ESG disclosures were of fundamental importance to whether companies were “properly managing and overseeing these risks within their business and adequately planning for the future”. Further, where companies do not report such issues robustly, “BlackRock will increasingly conclude that companies are not adequately managing risk”. This message has now been reinforced by a statement issued by three asset owners — the Japanese Government Pension Investment Fund, the California State Teachers’ Retirement System, and the UK Universities Superannuation Scheme (together, the Asset Owners) — in which they noted that companies that seek to maximise revenue without consideration of other stakeholders (e.g., the environment, workers, and communities) will no longer be considered attractive investment targets.
Potential environmental, social, and governance (ESG) issues posed by suppliers in increasingly complex supply chains can increase reputational risks to an organization. Corporate supply chains generally include every company that comes into contact with a particular product or service. In other words, the “supply chain” refers to the series of steps and processes involved in the production and/or distribution of goods and services. This can include direct and indirect suppliers, manufacturers, distributors, and retailers, and may involve companies and individuals all over the world.
The US House Committee on Financial Services, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets has held the first ever US Congressional hearing on environmental, social and governance (ESG) issues. The hearing focused on reporting requirements for US public companies in response to increasing interest in the investor community for enhanced ESG disclosures and uniform reporting standards.