LAWRENCE — Companies often argue that requiring more information disclosures from public companies could overload investors. Those concerns are overblown, an analysis of comments to the Securities and Exchange Commission by a University of Kansas law professor shows. The study also reveals some surprising areas of common ground among companies and investors when it comes to how emerging risks, like climate risk, should be disclosed.
The study offers important context for understanding what’s missing from new proposed changes that the SEC released Jan. 30 and that could affect how public companies report key risks and uncertainties in the Management’s Discussion and Analysis, known as MD&A, section of their annual reports and periodic SEC filings. The new proposals are part of the SEC’s decades-long effort to modernize and simplify disclosure obligations for publicly traded companies, but in its new proposal, the SEC has again declined to make any changes to the rules on how reporting companies disclose environmental, social and governance — or “ESG” — risks.
Virginia Harper Ho, Earl B. Shurtz Research Professor at the KU School of Law, analyzed nearly 300 responses from business advocates, investors and third parties to the SEC about the need for changes to how ESG risk is disclosed in corporate annual reports, comments that the SEC has also considered in crafting the proposed rules.
In recent years, investors have begun to recognize that environmental risks can affect the value of a company’s stock. Sustainability practices, climate risk and related management decisions can also influence investors’ investment decisions. Although most other global capital markets have specific guidelines on how ESG risks should be disclosed, the SEC has been slow to change the rules on how companies provide information on such risks due to questions about the relevance of ESG information to investors and ongoing concerns that standardizing how such risks are reported would burden business with costly compliance obligations.
Harper Ho’s analysis of input to the SEC shows that investors were far more concerned about underdisclosure of ESG risks. They support streamlining of ESG risk disclosure instead, making environmental risk information available in corporate annual reports instead of being buried in sustainability reports that are less accessible and difficult to compare. Investors also indicated that voluntary reporting and reporting under current SEC guidelines on climate risk disclosure are both inadequate.
“The basic finding is that investor advocates are not worried about overdisclosure. If the information is in the public filings, they can analyze it,” Harper Ho said. “Where there’s overload is when material information is hard to find and when it is not presented in a way that’s comparable to other companies’ information.”
Comments from business advocates, on the other hand, revealed that companies preferred rules that allow them to decide if environmental risk factors are material to investors. Nearly all responses from business advocates claimed that voluntary reporting of ESG risks on corporate websites or in other sources outside the annual reports is adequate under current rules. Concerns about investor disclosure overload were voiced almost entirely by business advocates, many of whom indicated that their primary concern was the potential compliance burden of new reporting mandates.
Companies also voiced concern that too much information would harm investors and the nation’s economy.
“One of the stated worries was that too much disclosure regulation would mean fewer companies listing in the U.S., or more companies not wanting to go public at all,” Harper Ho said. “The study also found that the more specific the potential new rules are about what companies have to disclose, the less likely companies and business groups are to support them.”
While there was significant disagreement on what information should be disclosed, the study also identified surprising areas of agreement between investors and business advocates, Harper Ho said. One of those was broad support for ESG disclosure reform. More than 80% of the responses analyzed in the study urged the SEC to improve how companies disclose ESG risk information in their public filings.
“At the same time, no one thinks a kitchen sink approach to risk disclosure is a good idea,” Harper Ho said. Specifically, both sides agreed that companies should reduce generic risk disclosure and that asking companies to rank, prioritize or quantify risks is not helpful.
While the study revealed differences in investors’ and companies’ views, the more difficult question of how ESG risk information should be disclosed is one the SEC is still considering. Harper Ho hopes to address that question in future research but said that this rare opportunity to analyze investor and business positions on disclosure reform empirically can help guide the SEC and lawmakers as they continue work on streamlining and upgrading the current ESG disclosure framework.
“This is something that I think is only going to gain visibility and that we’re going to hear a lot more about,” Harper Ho said. “ESG disclosure is an important area for not only for companies and investors, but for the SEC as well.”
The article is forthcoming in the Villanova Law Review.
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