Could ESG Disclosure Have Prevented the Financial Crisis?
By Steve Schueth
ESG disclosure is not likely to have provided a total remedy all by itself, but I think that improving disclosure requirements around environmental, social, and governance risks is an important part of rebuilding the system. The key to ensuring a brighter economic future depends on promoting greater transparency, shifting investment culture to a longer term orientation, rebuilding consumer confidence, and asserting public accountability.
A recent initiative of more than 50 major investment firms and professionals, including First Affirmative and the Social Investment Forum, seeks to do just this by requesting that the SEC require all public companies annually to report on ESG issues.
In the letter to SEC Chairman Mary Schapiro that accompanied a proposal, the investors wrote: "The present global economic crisis has made it readily apparent that our existing system for corporate reporting has failed shareholders. We believe that robust sustainability reporting could have mitigated some of the impacts of the financial crisis. These types of disclosures would have promoted longer-term thinking by investors and corporations, and earlier detection of predatory lending and other destructive business practices… We are confident that mandatory sustainability reporting will contribute significantly to rebuilding public trust in corporations as well as the agencies regulating them in the wake of the present crisis."
The submission includes two proposals: First, that the SEC require an annual report covering a uniform and comprehensive set of sustainability indicators as defined by the most comprehensive level of the current Global Reporting Initiative (GRI) guidelines. Second, that the SEC issue "interpretative guidance" to clarify that all companies must disclose sustainability information and the long- and short-term risk implications in the management discussion and analysis section of the annual 10k Report.
So what is the current state of ESG disclosure?
You might be surprised to know that under the voluntary system now in place there is no comprehensive, standardized, or compulsory method for releasing ESG information to shareowners. A Government Accountability Office report issued in 2004 acknowledged that "little is known about the extent to which companies are disclosing environmental information in their filings with the SEC."
How can we expect markets to perform with true efficiency when investors do not have access to potential risks and opportunities inherent to ESG performance? How can we expect to implement long-term investment strategies without impact analysis of sustainability issues, which by definition must look at long-term impacts? How can we expect to compete in a larger global market where other nations are taking these material considerations into account?
Posted: July 31, 2009