Asset managers are always looking for a valuation edge. But even when key factors are identified, the data may not be available. This is particularly true with environmental, social and governance (ESG) issues. No one will dispute their relevance, but few are able to reliably quantify their impact. That may soon change.
Bad Data
The value of ESG data is well understood. As early as 2016, BlackRock put out a white paper characterizing this information as “integral to our investment stewardship” of its more than $6 trillion in AUM. Since then, it’s been hard to find an asset management conference without a dedicated ESG panel discussing how important these values are to LPs and, as a result, to the GPs handling their assets.
The problem is the data. The ESG category is broad – it includes data such as a company’s impact on the environment, its relationships with employees and suppliers, and its views on diversity, executive pay and shareholder rights. For ESG data to be useful, it must be specific, reliable and consistently provided. For the most part, disclosure has been limited and voluntary, predominantly through the Global Reporting Initiative. Studies have identified problems with the reliability of the data, such as issuers not gathering data systematically or cherry-picking data to report.
The Proposal
Various stakeholders have made efforts to systematize reporting ESG data and are gaining momentum. In October 2018, law professors Cynthia A. Williams and Jill E. Fisch filed a petition for rulemaking with the SEC that was signed by investors and associated organizations representing more than $5 trillion in AUM. The petition directs the commission to a number of existing ESG reporting frameworks and requests the commission start the process of formulating specific, mandatory disclosure requirements.
Under the SEC rules, this petition will be referred to the appropriate SEC division for consideration and recommendations. Meanwhile, Congress is already considering bills requiring disclosure in varying degrees. On April 2, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled “ The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries.”
As evidenced by the SEC’s 2016 concept release on business and financial disclosure required by Regulation S-K, which included questions about ESG data, the SEC is interested in the issue, and the petition and interest from Congress will only further fan the flames. Before making any proposal, the SEC will work to align all the various stakeholders, from investors and consumer watchdogs to issuers themselves. Once demand for the information is clear and public companies are forced to report, private companies will not be far behind.
While this is not the first petition pushing the SEC to mandate similar disclosures, it is timely. Between the monthly reports of impending and dramatic climate change, the #MeToo movement, and more and more data confirming the importance of board governance to a company’s bottom line, the SEC may finally bow to the pressures of public opinion. We will continue to keep you updated.
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