Blog Article

SEC Requirements for ESG disclosures: Cause for celebration & how to do better

Tuesday 29 March 2022

For many decades, we have embraced a model of corporate reporting and disclosure that considers the risks that a company faces, how it will mitigate and adapt to those risks, and what metrics are most important and meaningful to the company’s bottom line. At last, the US Securities and Exchange Commission (SEC) is recognizing the ways in which environmental, social, and governance risks are presenting significant, financially material, and compelling influences over company performance. And perhaps more relevant still are the ways that company operations are influencing the environment in which we all live. That which is financially material to companies is existentially material to us all.

Historically, there have been no required ESG disclosures of public companies in the US; however, the SEC has required all public companies to disclose that which is material to investors, which has left the freedom to establish materiality to the reporting companies themselves and to their investors.

Voluntary ESG disclosures have been widely adopted and embraced by forward thinking companies. Such disclosure frameworks include the Global Reporting Initiative (GRI), the Value Reporting Foundation (formerly the Sustainability Accounting Standards Board, SASB), and The Task Force on Climate-Related Financial Disclosures (TCFD). The trouble rests with there being largely disparate and uncoordinated levels of depth, scope, and interpretations of materiality.

The US Impact Investing Alliance said: “Investors have long called for clear, comparable data related to material environmental, social and governance (ESG) issues - calls which have only grown more urgent in response to mounting and intersecting global challenges.[1]

The move by the SEC is important, significant and, will serve to advance not only transparency but the clear and unambiguous link between company operations and existential environmental health.

The new requirements, when codified and adopted, will “..also require companies to disclose the ‘actual or likely material impacts’ that climate-related risks will have on their business, strategy and outlook, including physical risks as well as possible new regulations such as a carbon tax[2].”

It’s worth noting that while in the US, we’re discussing the first required climate disclosures for public companies, in Europe, the conversation involves creation of the Green Deal. According to PWC, “The European Green Deal is the EU’s ambitious and comprehensive plan to become the first climate neutral continent and fundamentally transform the European Economy.[3]” Wildly different stages of engagement with ESG disclosures notwithstanding, the SEC is to be commended for this recent action.

Admittedly, environmental data is more empirical, quantitative and, easier to compare between companies. Social and Governance data tend to be more qualitative and contextual, rendering it harder to make straight comparisons, across companies.

The issue with the recent SEC requirements on ESG disclosures is that they are almost purely environmental. What about necessary social and governance disclosures? I’ll comment further in a forthcoming article on Russia as an ESG case study, where one could argue that the failure to identify and divest from Russian assets (by ESG funds) was largely a dearth of social and governance data and focus.

Here’s how the SEC can do even better

  1. Establish a core (baseline) and comprehensive (stretch) list of social and governance disclosures for public companies to make
  2. Align ESG disclosures of public companies with one or more of the current ESG reporting frameworks: GRI, SASB, or TCFD ideally
  3. Require a comprehensive stakeholder engagement process and evidence of both findings and subsequent actions
  4. Bring forth the timelines for external audit – not just for financial performance but for social and governance performance
  5. Broaden our understanding of Materiality. Move beyond financial materiality to include reputational and societal materiality

Social & Governance Disclosures

It is entirely positive that the SEC are inviting public comment on forthcoming environmental disclosures. It is commendable that Scope 1 and Scope 2 emissions are included in early disclosure requirements and that Scope 3 emissions reporting will follow, for some companies. As environmental reporting requirements are phased in, so must the social and governance policies and performance of companies. Climate change certainly represents financially material risks to companies; but so do social and governance matters. For example, a company found to be systematically (or perhaps unknowingly) failing to enforce gender pay equity will be exposed to significant financial consequences, should that deficiency be discovered. Likewise, a company lacking adequate governance policies and procedures will face significant financial consequences if company directors are found guilty of money laundering or bribery.

ESG Reporting Frameworks

Over the last nearly two decades, organizations like the Global Reporting Initiative (GRI) have been engaging companies from an array of industries to assess, report, iterate and learn from that which is most material in a given industry. The SEC is doing an important thing by increasing ESG disclosure requirements, but there is no need to reinvent the wheel. There are a host of metrics, lists of disclosures, and other tools issued by the most preeminent ESG frameworks. GRI, SASB, and TCFD spring to mind as frameworks the SEC could employ to ensure uniformity, transparency, coordination, and comparability of ESG disclosure data.

Stakeholder Engagement

Companies have a multitude of stakeholders. For the purposes of financial materiality and company performance, we tend to focus on the stakeholder group called shareholders. There are good reasons for this. But arguably, a company’s exposure to financial risk increases if it fails to engage its staff, customers, and communities. A well-documented process of stakeholder engagement, which includes not only shareholders and company staff, but also supply chain partners, communities influenced by the company, customers, and other downstream groups and individuals affected by company operations is worth reflecting in company disclosures.


The idea of requiring financial reporting without corresponding audits would be unthinkable and even irresponsible. Why should it be any different for financially material environmental, social, and governance disclosures?

If a piece of data is worth reporting, it is also worth verifying and auditing. Groups like BlueMark, a Tideline company, provide independent verification of stated ESG and Impact practice and performance, to ensure declarations are validated and ESG performance is assured by a third party. The practice communities for GRI, SASB, and TCFD also boast certified verifiers of disclosures. There is no absence of skilled professionals or tools to empirically verify and audit ESG disclosures. All that is needed is a sense of urgency and a timeline that reflects the seriousness and verifiability of ESG data.


This point is nuanced. Arguably, any issue that could pose a financial risk or opportunity to a company is material. In the same way that many have been at pains to articulate the financial materiality of environmental issues, so too must the definition of financial materiality absorb reputational and societal risks and opportunities. A company’s reputation is a delicate and evolving piece of its identity. I have seen companies buckle, overnight, in the wake of legitimate reputational attacks. If the concept of materiality is to adequately guide company priorities, investment, disclosures, and risk mitigation then it needs to include data which is immediate and direct in its financial implications, as well as data that is longer term, indirect, and representative of a company’s reputation and its contribution to society.

Final Thoughts

One of the many ways I think about ESG, at the macro level, has to do with establishing, building, growing, protecting and maintaining a company’s reputation. The ESG policy and performance answers the question: Who are we? What is important to us? What will we measure, manage and protect? And how has this piece of our identity been woven into every facet of our company and every stage of our life cycle?

As both a strategic and tactical institution, SEC mandates involve disclosure and investor protection, market efficiency, and capital formation. Where do concerns around environmental, social, and governance matters fit? Like core financial documents, ESG data present another important source of information on a company. If we are to honor the imperative to disclose all material information and to protect investors, then full and transparent disclosure of ESG data is imperative. And if we are to maximize market efficiency and contribute to capital formation, it must be done in ways that are sustainable, in ways that allow us to satisfy our own needs of the day, without sacrificing the ability of future generations to satisfy their needs and manifest their own highest aspirations.

[1] US Impact Investing Alliance. March 21, 2022. http://impinvalliance.org/news-updates/2022/3/18/us-impact-investing-alliance-celebrates-historic-step-forward-on-corporate-climate-disclosure-and-impact-transparency

[2] Johnson, Katanga. Reuters. U.S. SEC proposes companies disclose range of climate risks, emissions data. March 21, 2022. https://www.reuters.com/legal/litigation/us-sec-set-unveil-landmark-climate-change-disclosure-rule-2022-03-21/

[3] PWC. Are Europe’s Businesses Ready or the EU Green Deal? March 2022. https://www.pwc.com/gx/en/services/tax/publications/are-europes-businesses-ready-for-the-eu-green-deal.html

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