SEC Commissioner Hester M. Peirce described potential problems with expanding SEC financial disclosures requirements to include “soft issues,” such as environmental, social and governance (“ESG”) information. According to Ms. Peirce, “financial reporting loses its value when it is applied too broadly.”
In remarks before the 2018 Leet Business Law Symposium at Case Western Reserve University School of Law, Ms. Peirce argued that requiring companies to disclose information that does not relate to the long-term financial value of the company may harm shareholders. Ms. Peirce stated that the current federal securities laws have traditionally interpreted “material” disclosure as information that demonstrates the likelihood of a company providing a return on an investment. She pointed out that the more money a company spends on disclosures (which is a costly process), the less is available for shareholders.
Ms. Peirce also explained that the disclosure process was not designed to accommodate many “soft issues.” First, financial disclosures are intended to provide “material” information for the “reasonable” investor. According to Ms. Peirce, requiring companies to disclose information that “responds to interests unrelated to the investment’s profitability” (i.e., ESG issues) would make the term “material” meaningless. Second, Ms. Peirce contended that ESG issues are often not easily definable and the auditing process is not reliable. By way of example, Ms. Peirce pointed to the International Accounting Standards Board’s recently released framework, which focuses on the ill-defined term “stewardship.”
Lofchie Comment: Compare and contrast Commissioner Peirce’s skeptical statement on ESG disclosure with Commissioner Stein’s supportive statement (see also Cabinet commentary here). There are tremendous benefits to this open dialogue and the fact that the two Commissioners have clearly articulated opposing views.