In 2018 and 2019, the SEC released the first amendments to Regulation S-K to emerge from its decades-long project to “modernize and simplify” the disclosure obligations that apply to publicly traded companies. New proposed amendments released for public comment in August are currently pending. Largely missing, however, are changes to the basic rules governing how companies provide information to investors about risk, including emerging environmental, social, and governance (ESG) risks. The SEC’s caution is due largely to persistent concerns in the business community that any effort to standardize how companies report ESG risk factors will overload investors and obscure useful information, all while raising compliance costs for public companies.
At the same time, demand from investors for more information on ESG-related risks has been on the rise in recent years, fueled by growing recognition of its financial materiality. Internationally, over 60 governments and multilateral institutions, including the United Nations, the OECD, the G20, the International Organization of Securities Commissions (IOSCO), the International Accounting Standards Board (IASB), the World Federation of Exchanges, and the International Organization for Standardization (ISO), are promoting ESG disclosure reform. While there have been some efforts in Congress to take up these issues over the past year, reporting requirements for U.S. public companies deal with these questions in a largely ad hoc manner.
My forthcoming article, Disclosure Overload? Lessons for Risk Disclosure & ESG Reporting Reform From the Regulation S-K Concept Release, sheds light on market participants’ views on the core question in the over-disclosure debate: Does the federal disclosure framework suffer from critical gaps or instead exacerbate over-disclosure of risk? And if so in either case, where and how? Its conclusions are based on an empirical analysis of data drawn from nearly 300 public comments submitted between 2016 and 2017 in response to the SEC’s 2016 Regulation S-K Concept Release, comments that the SEC continues to draw on as it considers further amendments to Regulation S-K.
My article begins with a descriptive analysis of responses to over 140 of the questions in the Regulation S-K Concept Release that relate to risk disclosure, comparing the responses of investors and investor advocates with those of reporting companies and business organizations. It finds that there are statistically significant differences between these groups’ views on the following questions:
- whether over-disclosure in Regulation S-K is a critical problem,
- whether under-disclosure of ESG information is a concern,
- whether risk disclosure presents under- or over-disclosure problems, and
- whether disclosure should be principles-based, be prescriptive, or continue to follow a mixed approach.
However, regression analysis confirms that respondent identity is not predictive of either support for or opposition to ESG reform. Instead, the apparent divide between investors and business advocates is in fact driven more by underlying views on the desirability of prescriptive risk disclosure and by somewhat categorical positions on ESG materiality.
Specific key findings are as follows:
- Broad Support for ESG Disclosure Reform – And Not Just From Investors. Over 80 percent of the 281 responses in this study urged the SEC to improve how companies disclose ESG information in their public filings.
- Disclosure Overload of Investors Overblown. While investor responses support some streamlining of risk-related disclosure, most are far more concerned about the under-disclosure of material risk information, including material ESG risk information. Business advocates (96 percent), not investors, are the ones voicing concerns that disclosure overload may result if the SEC introduces mandatory ESG disclosure in some form – 63 percent of investors disagree, and these differences are statistically significant.
- (In)Adequacy of ESG and Climate Disclosure Under Current Framework. Nearly all Concept Release comments from companies and business advocates claim that (i) voluntary sustainability reporting adequately meets investor demand for ESG information; and (ii) disclosure of climate-related risk is adequate under the current framework. In contrast, over 90 percent of investors disagree with both of these claims and stress the costs to investors of having to rely on less reliable stakeholder-oriented ESG information outside the public filings. Differences among these groups are statistically significant.
- What Drives Views on ESG Disclosure Reform.
- Support for (or opposition to) ESG reform has more to do with underlying views on materiality and the value of prescriptive disclosure and with the respondent’s level of satisfaction with voluntary disclosure.
- Whether respondents accept the materiality of at least some ESG factors is highly predictive of their support for ESG reform.
- Surprisingly, whether a respondent is an investor or business advocate, individual or institution, is not predictive of either support for or opposition to ESG reform, controlling for other factors.
- Common and Not-so-Common Ground. In general, comments from corporations and business advocates about the kind of information that meets investor needs are at odds with the views of investors themselves. However, this study also finds a surprising level of agreement among respondents on ESG materiality (96 of all respondents, and over 60 percent of corporate and business group respondents). There is also evidence of some agreement among respondents on the need to reduce generic risk disclosures and on the challenge of ranking, prioritizing, or quantifying risk factors.
As the SEC considers how to streamline the existing reporting framework and whether ESG risks warrant new disclosure reforms, the Concept Release data offer a unique opportunity to clarify where the battle lines lie for investors, public companies, and other respondents; to find areas of common ground; to hone in on the places where reporting requirements leave gaps; and to see where over-disclosure is a problem. Doing so reveals that for investors, worries about disclosure overload are largely irrelevant, and that the disclosure overload claims raised by many public companies and business advocates who responded to the Concept Release are largely a false front for predictable concerns about the regulatory burdens of mandatory disclosure. For investors, the far bigger concern is the under-reporting of material ESG risks under the current disclosure framework and the inadequacy of both voluntary disclosure and current SEC guidance.
 See, e.g. Comment of David S. Rosenthal, V. Pres., Exxon Mobil on Regulation S-K Concept Release to Brent J. Fields, Sec’y U.S. Sec. & Exch. Comm’n (Aug. 9, 2016) (“Excessive disclosure, however, imposes costs on us that ultimately are borne by both shareholders and those who use our products. In addition, excessive disclosure can overload investors with immaterial information that can render more material information difficult to find and evaluate.”).
 See generally Gunnar Friede et al., ESG and Financial Performance: Aggregated Evidence from More Than 2000 Empirical Studies, 5 J. Sustainable Fin. & Inv. 210 (2015) (analyzing this evidence since the 1970s). See also Task Force on Climate-Related Financial Disclosures, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, at iii, 5–9, 10–11 tbls. 1 & 2 (2017) (identifying the financial effects of climate-related risk).
 See, e.g. IFRS Press Release, Speech: IASB Chair on What Sustainability Reporting Can and Cannot Achieve, Apr. 2, 2019 (noting the IASB’s support for ESG reporting harmonization and the limits of disclosure as a form of regulation).
 See Climate Risk Disclosure Act of 2018, 115 S. 3481, 2018 S. 3481. In July 2019, the House of Representatives’ Committee on Financial Services’ Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held hearings on “Proposals to Improve Environmental, Social, and Governance Disclosure.”
 Surveys of institutional investors over the past year find that support for ESG disclosure has grown since 2016. For example, a 2019 study by Morrow Sodali found that 90 percent of institutional investors support the integration of ESG factors into existing mandatory disclosures.
This post comes to us from Virgnia Harper Ho, the Earl B. Shurtz Research Professor of Law and associate dean for international & comparative law at the University of Kansas School of Law. It is based on her recent article, “Disclosure Overload? Lessons for Risk Disclosure & ESG Reporting Reform From the Regulation S-K Concept Release,” forthcoming in the Villanova Law Review and available here.