The SEC have continued to report that the regulatory landscape for ESG disclosure may face significant changes in order to create consistent and comparable data for investors. SEC chair Gary Gensler noted that there is “currently a huge range of what asset managers might disclose or mean by their claims”, highlighting a need for improvement on ESG disclosure. Gensler went on to state how currently, when an investor reads existing ESG discourses, it can be “difficult to understand what some funds mean” highlighting the risk that investment advisors may “mislead investors by overstating their ESG focus” because of this misunderstanding.
The importance of ESG cannot be understated, with current social trends seeing more focus being placed on companies ESG performances. Companies producing strong ESG performance can show higher returns, lower risk and better resiliency during a crisis, whilst companies who do not provide these reports can be seen to be showing a lack of transparency, which may ultimately deter potential investors. The importance is further highlighted through the Deloitte Centre for Financial Services, who expect that ESG-mandated assets in the US to comprise 50% of all professionally managed investments by 2025.
Despite its increasing importance, it is still difficult to get ESG reporting right due to the ambiguity on what needs to be reported, with different companies only willing to disclose certain elements of data or not willing to disclose any of their overall ESG data. Currently, disclosing this data is voluntary, although the SEC has announced its intention to make quarterly ESG reporting mandatory for publicly listed companies. This leads to a new raft of issues on how to best report ESG data, as there are still no clear guidelines for companies to follow when reporting this. Companies will need to determine not only how to collect the data, but also how to understand, analyse and respond to the regulatory framework whilst establishing a consistent and understandable reporting regime.
There are great benefits for companies to having accurate ESG data, with the benefits split into four categories: financial, strategic, competitive and reputational. For a fund manager, reporting on these points is key to successful and accurate investor relations. The SEC continue their commentary on ESG, meaning managers must take their own ESG reporting seriously. Investors and managers will choose to work with firms who show that ESG is an important part of their business model, the perception showing flow of capital toward companies with strong ESG practices is higher, because ESG-compliant companies are widely seen as safer and more stable by investors in the current market.