Jumpstarting Sustainability Disclosure
The Business Lawyer (forthcoming, Fall 2021)
55 Pages Posted: 4 Mar 2021 Last revised: 16 Jun 2021
Date Written: September 15, 2020
The Securities and Exchange Commission is at the center of one of the fiercest debates in climate policy and corporate governance: What should U.S. public companies disclose about their climate change risks and other ESG issues? The debate has been intractable for fifty years. Activists and investors have been urging the SEC to adopt mandatory sustainability disclosures. The business community has opposed new disclosure obligations on the grounds of immateriality, cost and litigation risk. Historically, the SEC has rejected calls to establish ESG-specific disclosure requirements, relying instead on its general materiality standard for public company disclosures of business risks and trends.
In the meantime, public companies have responded to pressure from activists, investors, and other stakeholders by voluntarily publishing sustainability reports according to standards established by private standard-setting organizations with expertise in sustainability matters. But according to investors and other observers, the disclosures included in such voluntary sustainability reports are not sufficiently accessible, comparable and reliable to provide the information investors need to make informed decisions. Under the Biden Administration, the SEC’s leadership has started promoting the establishment of new prescriptive rules, but this can be expected to meet stiff resistance from the business community, and the Commissioners have entered a polarized public debate on the issue.
The SEC can jumpstart progress on this contentious issue by harnessing private ordering under the watchful eye of the regulator - requiring public companies to furnish to the SEC on Form 8-K the sustainability reports they are already producing. By requiring sustainability reports to be included in its publicly available EDGAR filing system, the SEC could improve the accessibility, comparability and reliability of sustainability disclosures without materially increasing costs or liability risks for reporting companies. This approach could break the logjam on ESG disclosures by lowering the cost of consuming, producing and regulating such disclosures while improving the quality of the information available to the market. Because it is a procedural, rather than a substantive approach, it could be implemented quickly to promote progress while a discussion of prescriptive rules takes place at a more deliberative pace.
Keywords: Corporations, securities law & regulation, administrative law, corporate governance, corporate social responsibility, CSR, sustainability disclosure, sustainability reporting, sustainability, disclosure, securities regulation, reporting, private ordering
JEL Classification: K22, K32, M14, M48, Q56
Suggested Citation: Suggested Citation