July 23, 2020

US Government Accountability Office: ESG Disclosure Is Prevalent but Problematic

Janine Guillot

Janine Guillot

A new report from the US Government Accountability Office (GAO) substantiates what capital markets have been telling us at the Sustainability Accounting Standards Board (SASB) for years: Investors don’t need more information about the environmental, social, and governance (ESG) challenges companies face. Rather, they need better information.

The GAO report is fact-based, drawing on extensive analysis of existing corporate disclosure and interviews with asset owners and managers both large and small. The findings are illuminating. In short:

  • Nearly all investors agreed that key sustainability information—such as a bank’s cybersecurity program—can be an important indicator of its long-term financial performance.
  • These investors are increasingly asking companies to disclose decision-useful information about such sustainability-related risks and opportunities.
  • The GAO’s analysis of existing company disclosure—covering 32 large- and mid-size firms across eight industries—revealed that nearly all organisations already disclose sustainability information about a wide range of general and specific ESG issues.
  • However, those disclosures lack comparability across companies and vary greatly in terms of the level of detail they provide about how the company is managing relevant challenges.

Together, these findings point to the need for a generally accepted market standard for investor-focused sustainability disclosure. This is precisely what SASB was established to do. As the GAO report’s findings demonstrate, companies are already disclosing information on these issues; SASB standards would simply help them make those disclosures more consistent, comparable, and reliable.

Since the GAO report’s release, Senator Mark Warner of Virginia has called on the US Securities and Exchange Commission (SEC) to establish an ESG Task Force to explore potential solutions, which the report notes may take the form of regulatory or legislative action or a private-sector approach. SASB has also urged the SEC to take action, by either strongly encouraging or more explicitly requiring companies to make more effective disclosures regarding financially material ESG risks and opportunities. If the SEC were to require such disclosures, it could adopt a principles-based rule; companies would then use a market-based set of standards, such as SASB standards, to fulfil the regulatory requirement. This approach would combine a regulatory mandate with the nimbleness of a market-based solution. As the GAO report points out, such an approach would not be without precedent, most significantly with respect to use of the COSO framework to fulfil statutory internal control reporting requirements.

Whatever the outcome, investors will continue to seek ESG information that supports their needs and policymakers are increasingly taking notice around the world. As Europe continues to take a leading role in addressing this global challenge, other markets will be pressed to keep pace. Indeed, as the SEC’s Investor Advisory Committee recently suggested, absent a proactive approach to ESG disclosure by the Commission, “it is highly likely that other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow, either directly or indirectly, due to the global nature of the flow of investment into the US markets.”

Securities regulators in the US and beyond increasingly recognise that the financial implications of business-critical ESG risks and opportunities are relevant to their fundamental objectives: to protect investors, to ensure that markets are fair, efficient, and transparent, and to reduce systemic risk. Market-based disclosure standards, such as SASB’s, are a key tool to achieve those objectives.

Janine Guillot is CEO of SASB.