Why U.S. leaders must help push for ESG disclosure

Speakers stated that ESG issues can lead to material risks for investors and that markets must find a way to highlight them.

For example, during a panel on non-financial disclosure, IFRS Foundation Trustees chair Erkki Liikanen said data and ESG reporting fragmentation must be addressed, and that “we can’t be outside of this issue.”

Alain Deckers of the European Commission noted that preventing greenwashing and confusion around disclosure requirements is paramount, during the same panel.

The reason the European Union seems so far ahead of the rest of the globe is partly owing to the fact that “the U.S. is lagging behind,” said Erik Thedéen, chair of the International Organization of Securities Commissions’ Task Force on Sustainable Finance, also during that panel. “With the U.S. not on board, it’s hard to think of a global solution. Japan and Europe can agree, but the U.S. is so crucial.”

The global community is stepping up, he added, and it would be encouraging if the new U.S. administration is as “forward-leaning” as it appears.

Former SEC chair Mary Shapiro, who moderated the panel on non-financial disclosure, acknowledged that panelist Allison Lee, commissioner of the Securities and Exchange Commission (SEC) since 2019, has made some “compelling remarks about climate-risk disclosure.”

But, Shapiro added that the regulator hasn’t produced any climate-risk disclosure guidance since 2010.

When asked whether the Biden administration will be a boon, Lee responded that ESG issues are “critical” and that “the [SEC] must become more engaged — and swiftly.”

That’s also the message she gave earlier this year, in a public statement from January on how the agency was choosing to “ignore the challenge of disclosure around climate change risk rather than to begin the difficult process of confronting it.”

During the panel, Lee added, “We’ve learned so much [since 2010] about the risks associated with climate change, and there’s been a lot of progress in the number of companies producing climate-related disclosure,” which she credited to both past U.S. guidance and the ongoing work of groups such as the Task Force on Climate-related Financial Disclosures (TCFD) and SASB.

Looking ahead, Lee said, “We have passed something of a tipping point with respect to the efficacy of a voluntary [ESG disclosure] regime. We have numerous bespoke requests from investors and raters, and issuers are responding to so many competing and conflicting demands for information.”

Lee recognized that regulators like the SEC must come together to create standardized, reliable ESG and financial data. “We could potentially build this in through a scaled disclosure effort that also recognizes, as TCFD and SASB do, the considerable differences between sectors and industries.”

It won’t be an easy road, she said, but the global regulatory work already done will help the U.S. catch up and meet investor demand.

For all markets, a looming issue that remains is the “alphabet soup” of terms that are used when it comes to the ESG space.

This “creates problems with issuers, [financial report] preparers and investors,” said Deckers, adding that the term ‘non-financial disclosure’ was the latest to be rejected since it seems to place a wall between ESG issues and financial impact.

In the conference’s keynote discussion, CFA Institute president and CEO Margaret Franklin and State Street Global Advisors president and CEO Cyrus Taraporevala warned that lingering confusion around industry standards will only “open doors for those who don’t believe in ESG.”

Nonetheless, Taraporevala suggested that three encouraging trends are awareness of the growing correlation between ESG risks and performance, increasing investor knowledge and the increased involvement of regulators like the SEC.