Embracing the Inevitable: ESG Disclosures
When the Securities and Exchange Commission (SEC) called for public comments last December “on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies,” CFA Institute surveyed our members and held roundtable discussions to curate thinking on this topic. Our survey results can be found here.
CFA Institute also took this opportunity to learn more about their members’ thinking on environmental, social, and governance (ESG) reporting, because these factors are increasingly being incorporated into investment analyses.
Some 67% of survey respondents say they incorporate governance factors into their investment analysis and 51% incorporate environmental and social factors into their investment analysis. CFA Institute members who participated in the roundtables say they pay more attention to governance than to environmental and social factors. They emphasize the importance of governance disclosures, especially compensation.
More than half (52%) of survey respondents believe specific ESG and sustainability disclosures should be a regulatory requirement of public companies. These disclosures are now voluntary in many jurisdictions. Some 63% believe securities regulators should either develop ESG disclosure standards or support an independent standard setter to develop such standards.
Only 34% believe that ESG disclosures should be updated more than annually, and 48% disagree. On this point, we did identify some regional differences. In EMEA (Europe, Middle East and Africa), respondents are divided over whether ESG disclosures should be updated more than annually; in APAC (Asia Pacific), they are in favor of it; and in the Americas, respondents are against it.
Because investors already incorporate ESG factors into their investment analysis, CFA Institute believes securities regulators also should focus on either developing ESG disclosure standards or supporting an independent standard setter to develop such standards. Furthermore, specific ESG and sustainability disclosures should be made a regulatory requirement of all public companies.
Some comments from the survey follow:
“I think the risks of a changing climate and the risks of poor governance are very important for long-term investors and therefore need to be standardized.”
“ESG is important from a social perspective — just generally doing the right thing is positive for society.”
“ESG is defined differently by different investors, it is qualitative factor and should not be standardized — it is like social moral hazard issues — two people can differ on what is morality.”
“The Sustainability Accounting Standards Board standards should be strongly considered by regulators as forming the basis of a standard.”
“I strongly support using an independent standard setter rather than the SEC.”
“Given the diversity in which ESG disclosures are relevant for each company/industry, and the lack of standard. . . . it seems premature to formalize reporting frequencies etc.”
When it comes to ESG reporting, survey respondents and roundtable participants say that they incorporate governance factors into their investment analysis to a greater extent than they incorporate environmental and social factors. Investors, however, note that ESG means different things to different people. Hence, clear definitions of the metrics are needed.
CFA Institute believes that these results are in line with its long-held position that fully functioning capital markets rely on complete, timely, and accurate information. The provision of such information through a consistent reporting system raises investor confidence, which ultimately strengthens the capital markets.
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