US companies, get ready: the SEC’s ESG disclosure framework is here.
Two weeks after G7 finance ministers pledged to make climate-related financial disclosures mandatory, US lawmakers last week approved legislation requiring standardised ESG reporting.
The US House of Representatives passed the ESG Disclosure and Simplification Act on Wednesday. Under the bill, the SEC will create definitions of ESG metrics and “their connection to the long-term business strategy,” as well as mandating standardised ESG disclosures.
Perhaps unsurprisingly, as investors apply pressure on companies via coalitions such as CDP and Ceres, they have been met with resistance. More surprisingly? The companies bearing most public scrutiny for their resistance are to be found in the (traditionally ESG-friendly) tech sector.
Earlier this month, Amazon and Facebook signed a letter to the SEC stating they support “regular and consistent reporting of climate-related matters” but urging the regulator to allow ESG data to be published separately from main financial reports. More recently, Alphabet and Microsoft asked that ESG information not be included in 10K filings.
In both cases, the companies in question expressed concern about potential legal risks, due to the fact that extra-financial data is subject to more uncertainty than traditional financial and risk data.
As it happens, we agree.
Disclosure is important and relevant — if there’s substance behind it. The problem is, if current ESG metrics are so nebulous and uncertain as to create legal risk, the implication is there’s very little substance therein.
And disclosures aside, tech companies are net positive against most social and environmental metrics.
Take SSGA’s SPDR NYSE Technology ETF (XNTK), profiled above. The fund tracks the NYSE Technology Index, which is comprised of 35 leading US-listed technology-related companies: the same companies at the heart of last week’s dialogue.
We assess companies and portfolios as an aggregation of what they do, or produce, rather than what they say, or disclose. Like Amazon and Facebook, Alphabet and Microsoft, we don’t think disclosures are the be all, end all — or even, with regards to current benchmarks, fit for purpose.
Perhaps that will change, with the right framework, eventually. But in the meantime, what could possibly be more reflective of a company’s material risk and impact than the revenues that support its existence?
