In 1977, a gallon of gas cost 65 cents, the first Apple II computers went on sale and wrist-worn AM radios were flying off the shelves. That same year, the U.S. Securities and Exchange Commission (SEC) adopted Regulation S-K—a rule requiring companies to make descriptions of their business practices public to “streamline the preparation of disclosure documents” and to “assure uniform information for investors.” In short, Regulation S-K mandated what information public companies must provide to investors to allow them to make informed investment decisions.
Nearly 40 years later, the SEC is assessing disclosure requirements in Regulation S-K via a “Concept Release.” Because in the world of investing—like AM radios, the Apple II computer and the price of gas—things have also changed. As a result, the Concept Release has received more than 26,500 comments, according to the new report Towards a Sustainable Economy, recently released by Center for American Progress, US SIF, AFL-CIO, Ceres, Public Citizen and others. To put that figure in perspective, of the major proposals the SEC has released since 2008, the median number of comments received was just 45. Despite the ongoing disclosure effectiveness review process and overwhelming demands from investors for greater disclosure, the SEC has not mandated the disclosure of comprehensive information about a public company’s environmental, social and governance (ESG) practices.
Today, the concept and practice of sustainability is part of nearly every aspect of daily life—from food and cleaning products, clothes and transportation, to business practices and investing. In fact, the interest in considering environmental, social and governance factors in investment has exploded. More than 99 percent of commenters to the Concept Release support expanded ESG disclosures, according to Towards a Sustainable Economy. Given that only eight sustainability related questions were included in the 341-page Concept Release, this is an important indicator.
Kara M. Stein, an SEC Commissioner, noted that, “Today, investors make their decisions based on an array of information, which goes beyond mere profit and loss. Many believe that the era of sustainability or impact investing has arrived. Sustainability disclosure differentiates companies and it may foster investor confidence, trust, and employee loyalty. More importantly for investors, companies that adopt certain environmental, social, and corporate governance or ESG measures may perform better than those that do not. Yet our current disclosure regime, and the current Concept Release, do not specifically address many of these ESG topics. For example, how should a modernized disclosure regime address communication to investors about diversity and inclusion measures? Should there be specific disclosure requirements added to enhance transparency for investors regarding the companies they invest in? Are they good corporate citizens? Are they socially responsible?”
Research by the US SIF Foundation shows that sustainable, responsible and impact investing (SRI) grew 929 percent—a 13.1 percent compounded annual growth rate—between 1995 and 2014. From the beginning of 2012 to 2014, SRI assets in the U.S. grew from $3.74 trillion to $6.57 trillion—a 76 percent increase, which means more than one in six professionally managed assets utilize one or more strategies of sustainable investment.
More and more firms are using data on environmental, social and governance issues to identify risks within a company because of the increasingly widespread view that companies that focus on long term value versus short-term results are more successful. In 2015, Deutsche Asset & Wealth Management and Hamburg University analyzed more than 2,000 empirical studies and found a positive correlation between corporate ESG performance and financial performance.
Businesses that treat employees well are less likely to be fined or sued, have higher productivity and fare better in the long run. Companies that focus on cutting waste and using less energy can operate more efficiently and effectively, saving money. Companies that are careful to avoid human rights abuses in their supply chain avoid significant reputational, regulatory and litigation risks that have an impact on financial performance.
US SIF and many investors petitioned the SEC in 2009 for mandatory ESG disclosure. The recent Concept Release by the SEC is the closest the agency has come since then to articulating an interest in hearing from the public on a range of sustainability issues. This is a pivotal moment for sustainable and impact investing and we strongly urge the SEC to move forward on broader disclosure requirements that include comprehensive ESG data.
This is a rare opportunity to rethink what information investors need to make informed choices now and in the future, and we must seize it.
Lisa Woll is the CEO of US SIF: The Forum for Sustainable and Responsible Investment, the leading voice advancing sustainable, responsible and impact investing across all asset classes.