SEC Officials Highlight Requests to Improve ESG Disclosures and Arbitration Process

SEC Chair Jay Clayton and SEC Commissioner Kara M. Stein highlighted (i) the increasing number of investor requests for improved environmental, social and governance (“ESG”) disclosures, and (ii) the need to improve the arbitration awards process.

In remarks to the SEC Investor Advisory Committee, Mr. Clayton stated that the agency observed an increasing number of issuers disclosing ESG information and requests for ESG information by investors. He argued that (i) companies should focus on providing material disclosures that investors need in order to make informed investment and voting decisions and (ii) investors should also focus on each company’s specific circumstances.

Ms. Stein emphasized that certain investors believe it is critical to understand ESG matters to better evaluate a company’s performance. According to Ms. Stein, the reason that 43 percent of the shareholder proposals submitted during the last proxy season focused on ESG issues is because these investors believe there are “links between ESG matters and a company’s operational strength, efficiency, and management.”

As it relates to improving the arbitration process, Ms. Stein stated, even if a retail customer wins their arbitration after being harmed by a broker-dealer, the investor may not actually receive the damages award. Ms. Stein argued that enhancing the arbitration process is of great importance to retail investors and to broker-dealers who have not broken any rules. Mr. Clayton further stated that from the vantage point of a harmed investor, the ability to collect monetary damages from the wrongdoer is as important as the standard of conduct that our rules and regulations impose.

Lofchie Comment: As to Commissioner Stein’s observation that 43% of proxy requests were as to ESG matters, it is fair to ask “how many shares did those investors own”? and “were those investors motivated by concerns for the company, or did they have another agenda”? By way of example, PETA regularly participates in proxy contests. Its agenda is based on moral views regarding the treatment of animals, not on a desire for profit maximization; PETA is unlikely to advocate for investment in glue factories even if it were sure to double return on equity. Similarly, Chick-fil-A doesn’t close on Sundays to profit maximize. These are two examples of companies acting on certain moral values, which we may share, or not. If rectitude and profit maximization were just two sides of the same Roman coin, a camel could pass through the eye of a needle.

Comments are closed.