Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure

66 Pages Posted: 1 Dec 2022

See all articles by Lisa M. Fairfax

Lisa M. Fairfax

University of Pennsylvania Carey Law School - Institute for Law and Economics

Date Written: November 29, 2022


In March 2022, for the first time in its history, the Securities and Exchange Commission (the 'SEC') proposed rules mandating disclosure related to climate change. The proposed rules are remarkable because heretofore many in the business community, including the SEC, vehemently resisted climate-related disclosure, based primarily on the argument that such disclosure is not material to investors. This resistance is exemplified by the current lack of any SEC disclosure mandates for climate change. The proposed rules have sparked considerable pushback including allegations that the rules violate the First Amendment, would be too costly, and focus on 'social' or 'political' issues beyond the SEC’s mission. Thus, it is unclear whether, or to what extent, a climate-related mandate will emerge. Nonetheless, the proposed rules represent a significant and historical occurrence in the lifecycle of the SEC’s disclosure regime. The proposed rules reflect the dramatic increase in investor and other stakeholder attention on environmental, social, and governance ('ESG') matters. This increase has coalesced into demands for ESG disclosure. ESG disclosure advocates believe that ESG disclosure will provide stakeholders with the information they need to better monitor corporations’ ESG activities and hold corporations accountable for their ESG commitments. ESG disclosure demands have translated into a dramatic rise in voluntary ESG disclosure on corporate websites and various social media outlets. However, dissatisfaction with voluntary ESG disclosure has prompted a strenuous push for mandated ESG disclosure culminating in the SEC’s historic climate-related rule proposal. While this article supports mandatory ESG disclosure, this article argues that the potential for such disclosure should not cause ESG advocates to dismiss the continued importance of voluntary ESG disclosure. This article situates the current ESG disclosure discourse within the broader long-standing debate around public disclosure, and then advances a novel reconceptualization of that debate. In so doing, this article argues that the historical disclosure debate set up a false disclosure choice between voluntary and mandatory disclosure. This article coins the phrase 'dynamic disclosure' to shift disclosure discourse from a binary debate pitting voluntary disclosure against mandatory disclosure towards a recognition of the inextricable link between mandatory and voluntary disclosure. Although novel, normative support for this article’s disclosure reconceptualization can be found in recent scholarship related to corporate 'publicness', which scholarship recognizes that the modern social media environment ensures that all publicly disclosed information—voluntary and mandated—is on a continual and interconnected feedback loop. Moreover, this article reveals that voluntary disclosure not only has important benefits that cannot be fully replicated by mandated disclosure, but also serves as both foundational support and gap-filler for mandatory disclosure. Thus, recognizing and embracing the value of mandated disclosure does not render voluntary disclosure superfluous or inconsequential. By highlighting the continued and complimentary value of voluntary disclosure, this article’s assertions around dynamic disclosure have significant repercussions. This article uses ESG disclosure to highlight those repercussions and thus to illuminate the importance of maintaining a robust voluntary ESG disclosure regime even as we push for mandatory ESG disclosure.

Keywords: Securities law & regulation, corporate governance, voluntary & mandatory disclosure, environmental, social & governance, ESG, accountability, transparency, investors, stakeholders

JEL Classification: G34, G38, K22

Suggested Citation

Fairfax, Lisa M., Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure (November 29, 2022). U of Penn, Inst for Law & Econ Research Paper No. 22-43, Texas Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4289802

Lisa M. Fairfax (Contact Author)

University of Pennsylvania Carey Law School - Institute for Law and Economics ( email )

3501 Sansom Street
University of Pennsylvania Carey School of Law
Philadelphia, PA 19104
United States
215-746-2243 (Phone)
215-573-2025 (Fax)

HOME PAGE: http://https://www.law.upenn.edu/faculty/fairfaxl

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