SEC Chairman Offers Guidance on ESG Disclosure

April 26, 2018

Useful information for investors is paramount.

Jay Clayton, SEC Chairman, and Bill McNabb, Vanguard ChairmanBy Eve Tahmincioglu

Environmental, social and governance, commonly known as ESG, is a hot topic today in the boardroom, but what should companies be disclosing as far as these efforts?

Directors got a bit of direction from the nation’s top securities regulator recently.

It all comes down to “what helps the investor make an informed investment decision,” stressed U.S. Securities and Exchange Commission Chairman Jay Clayton who spoke at Drexel University’s Directors Dialogue Dinner where the establishment of the Raj & Kamla Gupta Governance Institute was announced.

The question about ESG disclosure came from F. William McNabb, the Institute’s first executive in residence and chairman Vanguard Group Inc., during a conversation the two men had before the Drexel audience earlier this month.

(Related article: ESG's Knocking on the Boardroom Door.)

McNabb asked: “How are you looking at this from a regulatory standpoint?”

As far as disclosure, Clayton said, "you want to deliver a package that is based on materiality. What do investors want to know in order to make an informed investment decision? That becomes infinite. You have to bound the disclosure requirement to what helps the investor make an informed investment decision.”

With ESG, he continued, “G is easiest of those” because there are “understood models, understood metrics. We can get to a pretty common template.”

As far as ‘E’, “people are understanding issues of environmental impact. We see E disclosure improving.”

But “S is difficult,” he maintained. “What are the metrics behind the S? It has to fit into what’s material before it becomes a requirement. What do people understand and what can be prepared efficiently?

(Related article: Social Good Deficiency?)

“As our economy evolves,” he added, “when looking at our disclosure rules, they are rooted in an industrial economy. [Disclosure] should evolve as our economy evolves to a services economy -- rooted in what drives returns.”

McNabb asked if there were specific things boards should be thinking about as the economy moves from industrial to services.

Clayton said he is “very interested in hearing from investors what are elements of economy today that we should ensure companies are focused on. That’s what we want to hear form the investment community.”

McNabb asked whether Clayton could share best practices for boards?

Clayton cautioned against a one-size-fits-all approach. “Depending on the industry, size of company, your engagement with shareholders may be different. I hesitate to say what one model for shareholder engagement should look like. Thinking of those things on an idiosyncratic basis makes more sense.”

To that McNabb asked how boards should balance stakeholder-versus-shareholder need?

“It’s a very hard question,” he replied. “Having a focal point for decision-making be what’s in the best interest of shareholders leads to much more efficient decision-making.

“I do think many of those stakeholder elements are in fact components of shareholder return.”

McNabb countered that people trust their money with Vanguard and they expect a return.

To that, Clayton said watching out for stakeholders could ultimately pay off for shareholders.

“If governance is a means to an end, we focus on it, but we focus on it as effective means to an end. One of the ends I want to see,” Clayton continued, is whether “corporations are delivering for the American people, their employees and shareholders, and being respected for it. If efforts in governance can contribute to that, I think you’ve done pretty well.”