As accounting and sustainability standards and regulatory bodies begin work towards establishing a common set of ESG disclosure standards for company reporting, U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce has suggested taking a step back to consider the value and implications of these initiatives.
In a public statement on the SEC website, Peirce argues that rather than helping illuminate companies’ performance on sustainability issues, the homogenization of information that would result from a global standard would result in less useful and nuanced information, particularly given the complex and industry-specific nature of ESG data.
“A single set of metrics will constrain decision making and impede creative thinking. Unlike financial accounting, which lends itself to a common set of comparable metrics, ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries. The result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services.”
The SEC Commissioner refers specifically to the IFRS Foundation’s initiative to establish a sustainability standards board, and potentially ultimately establish global ESG reporting rules. In October 2020, the IFRS initiated a three-month consultation, launched with the release of a paper seeking feedback on the potential formation of global sustainability reporting standards, and its own place in that process. After receiving broad support by investors, regulators, investment organizations and other standards bodies, the IFRS announced it would take the next steps towards the formation of a sustainability standards boars, and last month launched a working group consisting of leading reporting standards bodies to accelerate the initiative.
Peirce’s statement comes as the SEC itself is re-examining the role of sustainability disclosure in company reporting. In February, SEC Acting Chair Allison Herren Lee announced the initiation of a review of the SEC’s guidance for public company obligations for disclosures related to climate change risk, citing increased demand by investors for material, comprehensive and consistent information, including the extent to which such reporting should be mandatory for companies.
Peirce takes specific issue with the concept of “double materiality” being discussed by the standard setters, which would require issuers to disclose information about how sustainability issues impact companies, as well as on how companies affect society and the environment. The SEC Commissioner writes that this concept “has no analogue in our regulatory scheme and the addition of specific ESG metrics, responsive to the wide-ranging interests of a broad set of “stakeholders,” would mark a departure from these fundamental aspects of our disclosure framework.”
Peirce warns of the drawbacks of an overly standardized, prescriptive approach to ESG metrics including stifling sustainability efforts, writing:
“Hampering the ability of the markets to collect, process, disseminate, and respond to price signals by boxing them in with preset, government-articulated metrics will stifle the people’s innovation that otherwise would address the many challenges of our age.”