Friday, November 08, 2019

SEC advisory committee examines ESG disclosures

By Amanda Maine, J.D.

The SEC’s Investor Advisory Committee heard from industry and academic representatives on the role environmental, social, and governance (ESG) disclosures play in investment decisions and the difficulties of quantifying ESG data for investors. Some of the panelists said that SEC action on ESG disclosures could improve their consistency and as a result, their comparability to the benefit of investors.

Need for ESG disclosures. The panelists agreed that the disclosure of ESG information is necessary regardless of whether investors are specifically seeking that information. Professor Satyajit Bose of Columbia University said that studies have shown a robust correlation between sustainability measures in corporations and financial performance. He also noted that while the numbers on sustainability investment are highly correlated with financial operating performance, market performance is a different matter. This suggests that it can take many years of sustainability investment before the market recognizes it, Bose said.

Michelle Dunstan, a portfolio manager at AllianceBerstein (AB), said that her firm incorporates ESG analysis in all its portfolios, not just those with an ESG mandate. She described AllianceBernstein as having a three-pronged approach to ESG. The prongs include "portfolios with a purpose" that target specific ESG goals for investments, as well as how the firm measures up to its own ESG policies. The other prong relates to portfolios with no explicit ESG mandate, she said. However, ESG considerations are still taken into account in these portfolios, Dunstan explained. For example, with heavy carbon emitters, analysis will examine if a carbon tax applies to a company or if one might be imposed in the future.

Where to get ESG data. Dunstan also emphasized the importance of engaging with companies on ESG matters. AB cannot rely solely on ESG rating firms; its representatives meet with management and boards of directors to discuss their approaches to dealing with ESG, she explained. She added that AB has its own ESG specialists as well as ESG training programs for its analysts.

Jonathan Bailey, head of ESG Investing at Neuberger Berman, also stressed the need for multiple sources of insight on ESG. He said that his firm seeks dialogue with companies, as well as NGOs and academics, to inform their decision-making regarding ESG investing. Like the other panelists, Neuberger Berman analysts examine ESG disclosures whether or not "sustainable" is in the portfolio’s name. He also advised that when it comes to ESG matters, the focus is on disclosure and not making a normative judgment about a company’s ESG policies.

Rakhi Kumar, head of ESG Investments and Asset Stewardship at State Street Global Advisors, described how State Street measures ESG through its R-Factor scores (Responsibility Factor), which leverage multiple data sources and aligns them to widely accepted, transparent materiality frameworks to generate a unique ESG score for listed companies. Kumar said that State Street also uses data from third party sources and integrates R-Factor data and specialized data to provide its clients insights about their holdings at the fund level.

Need for SEC action? Some of the panelists cited a need for standardization and consistency as a reason for SEC action on ESG disclosures. Commissioner Allison Herren Lee noted that the Commission last issued guidance related to climate issues in 2010 and that a lot has changed since then. Bailey described the current state of ESG disclosures by public companies as "patchy and inconsistent." He also said that he has heard from management who privately say they have collected the necessary data internally, but would prefer not to share it with investors over concerns relating to the actions of competitors and possible legal ramifications.

Jessica Milano, vice president and director of ESG Investment Research at Calvert Research and Management, said that any ESG disclosure framework must not rely on boilerplate disclosures because that would not be useful to investors. She said she supports a combination framework that takes into account different industry sectors, such as those of the Sustainability Accounting Standards Board (SASB). For example, a company in the consumer finance sector (such as a credit card company) may face environmental impacts mainly related to the energy uses of the facility, the disclosure of which would not be material. In contrast, disclosures related to personal data go to the core of the business and is material to investors.

Committee discussion. Committee member Barb Roper of the Consumer Federation of America asked about the definition of materiality when it comes to ESG disclosures. Bailey responded that SASB provides a framework for minimum standards, but his firm has clients that may have different expectations based on their portfolio choices. Dunstan agreed, advising that what is material can be a different decision based on the same information depending on how much weight a client attaches to it. She added that that her firm looks at materiality not only on a company level but also at a portfolio level to study the cumulative effects of a particular risk.

Committee member Prof. J.W. Verret of Antonin Scalia Law School at George Mason University thanked the panel for its input but lamented that there were no panel members who are skeptical of SEC involvement over ESG matters. Forced ESG disclosure can actually be counterproductive and harmful, including requiring the disclosure of proprietary information or increasing the regulatory and litigation risks that a company can face, according to Verret. As for materiality, Verret said that the appropriate denominator is not global; it should be particularized to a company. He also took aim at investment advisers and pension funds who use ESG as a means to advance a personal political preference.