Over the course of 2020, market forces drove corporations and institutional investors to make expansive commitments to their purpose and social responsibility. This fueled companies in many regions to publish lengthy reports under the ESG moniker (Environmental, Social and Governance). The volume of individual company disclosures will almost certainly increase dramatically in 2021. Will the quality of disclosures improve? How should these disclosures be integrated into the presentation of fundamental business performance?

In the U.S., the Securities and Exchange Commission has been noticeably absent from the intensifying public debates on the E and the S of ESG. It already addresses much of the G.

A compound question: Should and will the newly appointed SEC chair step up in 2021 on disclosure rules for issuers to drive greater transparency, integrity, and consistency on ESG? Would this be the most effective way to manage the many market players, each pursuing its own strategic and financial motives as well as scrambling to be the ultimate arbiters of ESG?

The cry for corporations to address broad stakeholder interests is a global one. Aspects of this debate are more evolved today in Western Europe than here in the United States. An increasingly global question is which environmental and social disclosures warrant a tighter framework and third party assurance? We speculate that guidelines due this year from the European Commission and commentary from the IFRS will influence some thinking on this front.

Critiques addressing ESG often imply there is a firmly established set of “best practices.” Not so. Today in the U.S., there are relatively precise rules for disclosures on governance structure and processes (the “G” of ESG). Most of this information is in increasingly lengthy shareholder proxies prepared for annual meetings and filed with the SEC. It is the norm to see supplemental information in this document responsive to outsiders’ comments, including proxy advisory firms and the largest institutional investor stewardship groups. Executive management teams and boards regularly review and defend these disclosures.

In contrast, disclosure requirements addressing environmental and social topics are decidedly undeveloped by federal authorities. Save for inclusion in company risk factors, E&S commentary is often consciously excluded from public companies’ annual reports on Form 10-K or other SEC filings. One motivation for lodging most E&S commentary outside of the SEC filings has been legal counsel’s notion that this reduces potential liability. Also at play here are evolving challenges to the definition of materiality – broadening from the SEC economically rooted definition of meaningful to a rational investor to currently much more subjective information.

Indeed, like their large European peers, nearly all of the S&P 500 Index member companies are publishing customized annual social responsibility or “sustainability” reports, as well as posting periodic website content and making bold forecasts on sustainability and human capital on company earnings calls. A number of third parties (including institutional investors, proxy advisers, ESG rating agencies, NGOs, and academics) are requesting various data sets and subsequently are distributing different E&S rating factors.

Independent auditing firms are not playing their traditional role here (albeit they are trying to figure out how), nor has an alternative method for achieving independent assurance of companies’ self-reporting been developed.

We continue to have an alphabet soup of non-governmental associations and product vendors engaged. The player list begins with NGO organizations such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force of Climate Related Financial Disclosures (TCFD).

For-profit vendors such as MSCI, Sustainalytics (Morningstar), S&P, and ISS-ESG are all vying for the pole position as scorekeeper. This latter group is sprinting to set the rules of the disclosure game for various parties, with clear intent to establish the uniqueness and ubiquity of their independent fee-based commercial product offerings. The ranking processes are not fully transparent. Moody’s, S&P, and Fitch – the large independent for-profit credit agencies – are also incorporating ESG commentary in their ratings. Not to be excluded, academic centers are developing analytic frameworks. Company information is effectively traveling through third-party filters and returning to investors in a scored form rather than being directly communicated through and integrated in investor documents.

Institutional asset management companies globally seem to be in the driver’s seat, pushing the ESG agenda forward. This group has adopted a mix of corporate social responsibility, sustainable investing, and impact investing themes. This probably constitutes the broadest repositioning for fund flows we have seen across the money management sector since the financial crisis of 2008.

This is driving shifts in the philosophy and processes of management firms, a pragmatic reaction to changing investor priorities as well as positioning for competitive advantage with new product development. Another catalyst is at play as well: Money managers themselves are being scored and ranked by the rating agencies on their implementation of ESG principles.

One need look no further than the newly released 2021 governance and proxy guidelines issued by the nation’s largest institutional equity investors — BlackRock, State Street, and Vanguard – a combination of increasingly assertive guidance, warnings, and promotional statements. These three firms are in effect playing regulators of ESG in our capital markets and demonstrating their willingness to take action at annual meetings or through special shareholder votes.

Are the standards regarding this E&S disclosure best set independently from the SEC? Under former Chairman Clayton in August 2020, the SEC mandated new disclosures on human capital management, effective with year-end 2020 filings. Importantly, these disclosure requirements are explicitly stated as principles based with sensitivity to materiality, not prescriptive or rules based. The SEC is asking companies for discussion of measures or objectives that address the attraction, development, and retention of personnel.  We expect to see a wide range of qualitative and quantitative responses in 2021 that will need to be significantly fine-tuned. Case in point, human capital data has not been traditionally processed through internal accounting and finance department systems.

E&S is difficult to tightly define, and cross-currents influencing the definition will intensify. The burden in 2021 will continue to fall on the marketplace, as we struggle toward “generally accepted ESG reporting principles.”

We do need more standardization here and expect the Biden Administration will propel the SEC to take action beyond the human capital request, likely next addressing climate disclosures and overriding the debate of jurisdictional authority. The SEC is ill-equipped to address the broad objectives incorporated in ESG. That said, there is ample rationale for seeking a referee.

Samuel G. Liss is the managing principal of Whitegate Partners LLC, an advisory firm to the financial and business services sectors. He also serves as an adjunct professor at NYU Stern School of Business and at Columbia Law School, teaching courses on corporate governance.