United States: How Do Investors Use ESG?

Last Updated: November 20 2019
Article by Cydney Posner

Last week, the SEC's Investor Advisory Committee held a meeting focused in part on the use of environmental, social and governance information in the capital allocation process—how do investors use ESG information in making investment decisions? The panelists—an academic and several representatives of asset managers—all viewed ESG data as important to decision-making, particularly in relation to potential financial impact, even for investment portfolios that were not dedicated to sustainability.

To open the meeting, Commissioner Allison Lee, after acknowledging how much emphasis investors are now putting on ESG issues, observed that the SEC "last issued guidance on climate-related disclosure in 2010. A lot has changed since then in terms of what we know about the significance of climate risk from a scientific standpoint, as well as what we know about the risks companies face as a result. A lot has also changed in terms of the kinds of disclosure that investors need to accurately assess and price that risk, on everything from board oversight of the risk to estimates related to stranded assets."


In August, Lee and fellow Commissioner Robert Jackson published a joint statement to encourage public comment about, among other things, the absence of climate risk as a topic for discussion under the Description of Business in the proposal to modernize Reg S-K (see this PubCo post), released on August 8. According to Lee and Jackson, while estimates of the scale of climate risk vary, "what is clear is that investors of all kinds view the risk as an important factor in their decision-making process. Yet it remains tough for investors to obtain useful climate-related disclosure. One argument against mandating such disclosure is that climate risk is too difficult to quantify with acceptable accuracy. Whatever one thinks about disclosure of climate risk, research shows that we are long past the point of being unable to meaningfully measure a company's sustainability profile." (See this PubCo post.)

Chair Jay Clayton, who was not in attendance at the meeting, but nevertheless provided a statement, expressed interest in understanding what data companies and investors use to make decisions, recognizing that the answers could be complex: "1) not all companies in the same sector use the same or comparable data in their decision making and (2) investor analysis also varies widely. In the areas of 'E' and 'S' and 'G,' in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames." To generate "decision-useful" (Clayton translation: material) information, these complexities must be taken into account. Clayton also noted that "E," "S" and "G" are very different in terms of disclosure:

"For example, 'G' is significantly rooted in and bounded by law, regulation and governance agreements, lending itself to a fair degree of precision. 'G' also generally is more historical than forward-looking and is substantially under the control of the registrant. 'E' has some similarities to 'G'—for example, 'E' disclosure is often based on law and regulation or at least the effects of law and regulation. However, 'E' disclosure can be significantly forward-looking, including estimating or otherwise discussing the effects of current law and regulation as well as pending or potential regulation. We have long recognized there can be a substantial difference between historical information and forward-looking information. As I have previously discussed with this Committee, due to this complexity, I have concerns that imposing a uniform, mandatory disclosure framework for many areas [of] 'E,' 'S' and 'G' disclosures runs the risks of sacrificing what may be the more relevant, company-specific disclosure for the potential for greater comparability across companies."

As he has historically, Clayton continued to promote the SEC's longstanding disclosure framework as the right approach to ESG.


Clayton has consistently been far from enthusiastic about marketwide ESG regulation: in the face of rulemaking petitions and other mounting calls for rulemaking that standardized ESG disclosure, Clayton's view was "that in many areas we should not attempt to impose rigid standards or metrics for ESG disclosures on all public companies. Such a step would be inconsistent with our mandate, would be a departure from our long-standing commitment to a materiality-based disclosure regime, and could effectively substitute the SEC's judgment for the company's judgment on operational matters." (See this PubCo post.) Instead, Clayton has favored application of "the 'materiality' based approach to disclosure regulation. This has been the commission's perspective for 84 years and it has served our investors and markets very well. Keeping that perspective in mind is critical to our mission." What that meant to Clayton was that if a matter was "going to affect the company's bottom line or presents a significant risk to the business, I would expect them to do something about it. If the matter is material, I also would expect the company to disclose the matter and what they are doing about it. This is consistent with general fiduciary obligations of directors and officers, as well as our disclosure rules." (See this PubCo post.)

In that regard, he has previously recommended a speech by Corp Fin Director Bill Hinman, which addressed the application of principles-based disclosure requirements to complex and evolving disclosure questions. In his speech, Hinman described "principles-based disclosure" as a framework where "requirements articulate an objective and look to management to exercise judgment in satisfying that objective by providing appropriate disclosure when necessary." One benefit of principles-based disclosure was that its inherent flexibility allowed disclosure to evolve with emerging issues.

In the speech, Hinman viewed the issue of ESG disclosure as "complicated," largely because of the tension between the desire of some for specific sustainability disclosure requirements—along with the debate about which set of reporting standards should apply—and the concern of others that specific sustainability disclosure requirements would elicit information that was not really material to a reasonable investor. (See, for example, this PubCo post and this PubCo post.) These issues had not yet settled out in the marketplace, and the SEC was continuing to monitor the evolution of market-driven solutions, comparing information in SEC filings with information provided voluntarily outside of SEC filings. In particular, the SEC was wary of imposing specific bright-line disclosure requirements that could increase the costs of being a public company without delivering relevant and material information to investors and others, thus potentially decreasing the attractiveness of public-company status.

In preparing principles-based disclosure regarding sustainability, Hinman advised that companies apply the MD&A standard of allowing investors to see the company "through the eyes of management," including describing plans to mitigate material risks and the material impact of these decisions on the business. He suggested evaluating the disclosure relative to the disclosure that management provides to the board.

With regard to climate-related disclosures specifically, Hinman referred to the SEC's 2010 interpretive release, which discussed the application of existing disclosure requirements to climate change issues. The approach taken there was consistent with the approach to cybersecurity—looking to the current disclosure obligations under existing laws and regulations for direction. Hinman cited as examples the discussions in the guidance of how "businesses that may be vulnerable to severe weather or climate-related events should consider disclosing material risks of, or consequences from, these events," as well as the nature of the disclosure that a company should provide, if material, if the company "determines that its physical plants and facilities are exposed to extreme weather risks and it is making significant business decisions about relocation or insurance."

Hinman noted that the guidance did not address the board's risk management role in this area, but that board risk oversight, including the relationship between the board and senior management in managing material risks, was a disclosure requirement under Item 407(h) of Reg S-K and Item 7 of Schedule 14A. Accordingly, Hinman advised, "[t]o the extent a matter presents a material risk to a company's business, the company's disclosure should discuss the nature of the board's role in overseeing the management of that risk." Hinman suggested that the SEC's cybersecurity guidance may provide useful parallels to sustainability and other emerging risks. (See this PubCo post.)

[Based on my notes, so standard caveats apply.]

At the Committee meeting, a Columbia professor specializing in sustainable finance discussed the "robust correlation" between measures of sustainability and financial performance, which has been demonstrated in thousands of studies. In particular, he cited a 2018 study of studies showing that sustainability measures were highly correlated with financial operating performance, but less so with market performance (suggesting that the market takes quite a while to catch up and recognize the benefit). He also observed that the largest asset managers have made clear that they do incorporate ESG information into their analyses. Many analysts tend to research outside of the financial statements for information that, although public, is not necessarily widely known, asking various stakeholders, employees, customers, regulators and others for ESG information.

A representative of AllianceBernstein, an investment manager, said that while they maintain one portfolio with an ESG mandate and one without, they incorporate ESG information in all of their actively managed portfolios because they believe that it drives better outcomes. Further, their analysts look at ESG issues for each company. For example, if a company is a significant carbon emitter, they might look into the potential for regulations or carbon taxes and consider what the impact might be on shareholder value. She also noted that, while they may use third-party ratings systems to a limited extent, for the most part, they consider them to be overly simplistic and backward-looking, taking into account only what can be measured, not what should be measured. The firm's engagement process drives home the point that ESG matters. She also lamented the lack of quality standardized data, which makes it more difficult not only for their own analysts, but also for companies, which end up spending substantial time responding to multiple requests for different types of ESG data (referred to by a committee member as "survey fatigue"). In her view, ESG information was becoming increasingly material, and the SEC could take the lead in driving more complete and accurate standardized data.

A representative of Neuberger Berman, an asset manager, observed that there has been increased industry acceptance of the importance of ESG in influencing risk and return; over one-third of their clients now ask how ESG issues are considered, and, in North America, there was a 94% increase this year in inquiries about ESG. He favored a disclosure standard that was more holistic than a normative critique of a company—with more standardized information and dialogue, they would be better able to perform analyses and reach more qualitative conclusions. He agreed that third-party ratings providers were limited in scope and too backward-looking; they are useful primarily as a starting point. Therefore, multiple sources were important. He also observed that different managers followed different risk-return strategies, requiring different types of ESG information. Currently, evaluating the information is an imprecise task because of the "patchy" and inconsistent nature of the disclosure among companies. There is insufficient quality, decision-useful data, exacerbated by corporate greenwashing. With some exceptions, companies spend too much on corporate social responsibility reports that are not decision-useful or comparable. For example, a study found that only 25% included quantitative information. He also contended that companies collect much more data for internal purposes than they share publicly. Typically, companies are unwilling to share more information because their competitors are not disclosing it and it's not legally required, which the SEC could address. But regulating is not the only approach; industry groups could do more, he said, citing as an example, the Edison Electric Institute, which has created a framework, informed by SASB (see this PubCo post), for the utilities segment. However, not all participate in these frameworks and their usefulness is constrained by the voluntary and consensus-building requirements of the process. The SEC could play more of a role, perhaps by developing safe harbors for disclosure or comply-or-explain disclosure requirements, focusing on financial materiality. He closed by adding that U.S. disclosure lags international markets in the ESG context.

A representative of State Street Global Advisors, the third largest asset manager, said that they view consideration of ESG as part of their fiduciary duty to clients. However, a recent survey found that availability of high quality information that was financially material, consistently disclosed and comparable across companies was one of the biggest challenges. And companies need guidance on how to measure and disclose ESG information in a standardized way. State Street leveraged SASB and other sources to develop their R-Factor" (responsibility factor) scores for their voting and engagement process. According to State Street, "R-Factor" is an ESG scoring system...that leverages multiple data sources and aligns them to widely accepted, transparent materiality frameworks to generate a unique ESG score for listed companies. R-Factor" measures the performance of a company's business operations and governance as it relates to financially material ESG challenges facing the company's industry. It is designed to provide companies a roadmap to improve ESG practices and disclosure, and to help create sustainable capital markets." They also use ESG information for client reporting and investment solutions. Depending on the type of investment strategy, some investment portfolios may require specialized data, but the information is always viewed through a lens of risk and return.

A representative of Calvert Research and Management, an investment manager, noted that 85% of the S&P 500 issue sustainability reports, but there is wide variation in the contents. They want companies to focus resources on the ESG risks and opportunities that are financially material. To the extent company disclosures are simply boilerplate, they are not particularly useful, but, she cautioned, without regulatory guidance, boilerplate would become more common. Studies have shown that ESG practices have converged, but that more differentiated practices are associated with better returns. How could disclosure of more relevant ESG information be encouraged? They supported the SEC's recent first steps toward human capital disclosure. Overly prescriptive rulemaking can quickly become outdated, but the lack of comparability is also problematic. They supported a framework that combined principles and prescription, such as the SASB framework, which uses standardized industry-focused metrics and a disclose-or-explain approach. For its analysis, they use KPIs focused on peer groups, which differentiate by industry with regard to the environmental and social components, but not on governance.

In the ensuing discussion, a participant floated the idea of the SEC's selecting an outside framework, such as SASB or TCFD, to mandate. Even though there are a number of frameworks, they are not regularly used or, if used, companies may respond selectively or fail to include quantitative data. One panelist observed that there is insufficient transparency into how companies determine which ESG issues are material for their financial performance. SASB was widely commended for its differentiation by industry, consistency of reporting and focus on financial materiality. One panelist said that there was broad consensus in the industry that SASB provides a common framework of decision-useful information that would be helpful to most investors. However, even among those who supported SASB, several considered SASB to be only a floor. One panelist suggested that, under SASB, it was easy for information to appear highly material even if, for that company, it was not.

SASB differs from TCFD in that it focuses on companies' operations and factors the company can control, while TCFD focuses on climate and also has a strategic aspect. One panelist said that SASB looks at materiality from an immediate perspective, while TCFD also considered medium-term materiality. It was also noted that companies might need some assistance in understanding how to comply with the TCFD. One panelist observed that companies do not yet have the kind of infrastructure needed to readily obtain the necessary data for many frameworks, as evidenced by the mad dash at year end to put reports together. One panelist observed that, although many companies provide sustainability reports, less than a third include third-party assurance. How do investors know that the information provided is accurate and comparable across companies? That is the assurance that regulation would provide.

While it was desirable to avoid burdensome regulation, the low level of current requirements was problematic in one panelist's view. But the panelists all seemed to consider it advisable to try to nudge companies toward some kind of framework for purposes of consistency, a process the SEC could do well. One panelist noted the need to recognize the difficulty of building consensus for a framework. One panelist commented that a way to build consensus would be to prioritize the easiest topics, such as energy use, where there seems to be some agreement about the measures, or climate. Another recommendation was to start with human capital management, which the SEC has already begun to tackle. (See this PubCo post.) Several participants lamented the possible adverse effect of the new SEC proposal to modernize the shareholder proposal process on smaller holders, particularly with respect to the potential for limitation of submission of climate-related proposals. Even small holders can be canaries in the coalmine. (See this PubCo post.)

One committee member said that it would have been helpful to have included some panelists with a perspective that was skeptical of ESG. As the lone committee member objecting to a more pronounced role for the SEC—or at least the only one that was vocal about it—he raised the possibility of adverse consequences if the SEC mandated ESG disclosure, including potential disclosure of proprietary information as well as litigation risk. The SEC should limit its role to policing disclosures. In addition, in his view, the empirics related to many ESG issues is more mixed than some might suggest. He also remarked that, according to many ESG skeptics, ESG is used simply as a way for analysts or advisors to follow their own personal political preferences, rather than as indications of performance.


As discussed in this PubCo post, according to this recent study from consulting firm McKinsey, investors want to see a different kind of sustainability reporting. The authors observe that, in light of mounting evidence "that the financial performance of companies corresponds to how well they contend with environmental, social, governance (ESG), and other non-financial matters, more investors are seeking to determine whether executives are running their businesses with such issues in mind." Although there has been an increase in sustainability reporting, McKinsey's survey revealed that investors believe that "they cannot readily use companies' sustainability disclosures to inform investment decisions and advice accurately." Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don't conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company. That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that's even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting.

In response to a question from McKinsey about sustainability standards, 14% of investors said there should just be fewer standards, but an overwhelming 75% of investors said there should be only one standard. Executives had a similar perspective: 28% said there should be fewer standards, and 58% said there should be only one standard. In addition, the vast majority of investors agreed or strongly agreed that more standardization would help with effective capital allocation (85%) and with more effective risk management (83%). A similar majority of executives agreed or strongly agreed that more standardization would help their companies benchmark against their peers (80%) and enhance their companies' ability to create value or mitigate risk (68%). What's more, 82% of investors said companies should be legally required to issue sustainability reports and, surprisingly, 66% of executives agreed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions