Investors who want to achieve greater global uniformity about how companies disclose their use of environmental, social and governance standards have suffered a setback after the US Congress rejected a move to introduce European-style reporting standards into America.
Republican members of the House financial services committee opposed proposed legislation this week that would require companies to report more ESG information, as well as specific disclosures for risks associated with climate change, to enable investors to keep tabs on their portfolios.
The legislation would require the US Securities and Exchange Commission to write ESG disclosure rules. To date, the agency has done little to advance climate change disclosures on its own, beyond a 2010 set of guidelines on how existing rules may apply to climate- or weather-related risks.
“Mandatory ESG disclosures only name and shame companies as well as waste precious company resources,” said Michigan Republican representative Bill Huizenga. “Mandating these disclosures is only doing more harm than good.”
The rejection by Congress will come as a disappointment for some asset managers, since ESG matters are sparking growing scrutiny in global markets. An increasing number of investors are seeking to incorporate ESG ratings, and Europe is introducing rules to make them mandatory.
However, asset managers have said that disclosures on various ESG risks are too often broad and hard to compare across markets and sectors. Such problems are likely to become more challenging if the US and Europe diverge further in their standards.
“Clearer and more comparable information about key ESG risks would benefit investors and the US capital markets,” the Council of Institutional Investors, which represents big public and corporate pension funds, said this week. “We are not confident this can come about through private, non-mandatory work” by companies themselves.
The Republicans’ opposition came days after the UK rolled out a green finance strategy that will explore a mandatory requirement for listed companies to disclose climate-related risks from 2022. This follows a 2016 French law that required investors in the country to disclose how they deal with ESG criteria.
For the US to hold off on mandatory ESG disclosure would establish different reporting regimes in different parts of the world — a scenario that “would be a tragedy,” said Timothy Mohin, chief executive of the Global Reporting Initiative, which develops ESG reporting standards.
More than 600 US companies are voluntarily using the GRI standards to disclose ESG information, Mr Mohin said, including almost 80 per cent of the companies in the Dow Jones Industrial Average.
“The biggest risk is that the US is not using the international common language,” Mr Mohin said.
In interviews with the Financial Times before the hearing, Republicans said they did not want to hit companies with additional disclosure obligations. Corporate rules for environmental protection already exist and adding disclosure costs could have a negative material financial impact on companies, said Republican representative Warren Davidson of Ohio. He added that Democrats appeared to be demanding more disclosures to score political points.
Indiana Republican Trey Hollingsworth said he was uneasy with adding more disclosures following a 2015 rule which measures a CEO’s pay against the company’s average employee.
“We don’t want to fall into this trap with ESG as well where the metrics we’re asking companies to disclose aren’t meaningfully measuring what we want them to,” Mr Hollingsworth said.
Janine Guillot, an official at the Sustainability Accounting Standards Board, a San Francisco-based body, said the criticism of ESG reporting tended to assume that ESG matters were not financially material to companies.
“That may have been true 10 or 15 years ago,” she said. “That is not true today.”
Large, mainstream investors “believe these are financially relevant issues,” Ms Guillot added. “That is not going to change.”
Source Financial Times