The Business Roundtable is a nonprofit lobby association whose members are CEOs of major U.S. companies. Together, these companies employ more than 20 million people and have a total market value of more than $20 trillion, about half the value of all publicly traded U.S. companies. The association lobbies for public policy favorable to business.
The Roundtable made headlines in 2019, when it issued a statement that companies should be run for the benefit of all stakeholders, not just stockholders. The following year, the group issued another statement declaring that the United States “should adopt a more comprehensive, coordinated and market-based approach to reduce greenhouse gas (GHG) emissions.”
Among its pronouncements, the Roundtable called for a unified climate change approach to replace what it called an “existing patchwork” of state and federal regulation that has “negatively impacted the long-term investment strategies of many U.S. companies by creating regulatory uncertainty.”
In what may be an example of “be careful what you wish for,” the U.S. Securities and Exchange Commission in March issued proposed rules that would require regulated businesses to provide climate-related information in their registration statements and annual reports:
“The proposed rules would require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant’s audited financial statements.”
Two weeks ago, the Business Roundtable filed its comments on the proposed SEC rules, calling some key provisions “unworkable” and imposing “requirements that could not be satisfied in the manner and timeframe proposed, and may not result in decision-useful information for investors.” The Roundtable comments also complained about the amount of information that the proposed rule would require and said the information “would not be comparable, reliable or meaningful, much less material, for investors.” The new rules would also subject companies to “significant liability for disclosures that inherently involve a high degree of uncertainty.”
According to The Corporate Citizenship Project, a think-tank focused on a data-driven approach to corporate governance issues, many companies and investors are trying to have it both ways regarding ESG reporting standards.
“The Business Roundtable made a controversial move when they recommended a departure from the long-standing principle that management’s priority should not be maximizing shareholder value. It appears they want to have their cake and eat it too when it comes to matters of ESG,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.
“Unfortunately, we believe proxy advisors like ISS ESG have pushed a culture whereby companies can pretend to be good corporate citizens while avoiding clear quantitative accountability metrics.”
In May 2020, the SEC’s Investor Advisory Committee recommended that the SEC “take action to ensure investors have the material, comparable, consistent information about climate and other ESG matters.” Among the recommendations, the committee noted that investors and ESG fund issuers need “accurate, comparable and material Issuer primary-source information … and consistent standards and oversight governing the disclosure of this data.”
The SEC’s proposed rules estimate that the cost to a company to meet the proposal’s required information would reach an estimated $640,000 in the first year and a continuing annual cost of $530,000. Because all this information would become public, ESG fund indexers and proxy advisory committees would have access to it at no cost.
Why then, would a company seek an independent, third-party ESG evaluation that would cost them even more? That would not be a good thing for the indexers or the proxy advisors like Institutional Shareholders Services or Glass Lewis. If advice and indexes essentially become commodities, the added value that indexers and advisory firms give could be limited, and clients might be unwilling to pay significant fees for the service.
Bryan Junus from the Corporate Citizenship Project adds, “We would not be surprised to see ISS actively lobby against quantitative accountability on ESG because we believe they have a financial incentive to keep the system murky and opaque. We hope that rent-seeking companies will not be successful in their quest to stop transparency being brought to the world of ESG ratings.”
The SEC is going to have a hard time threading the needle. Companies don’t want to be held to a climate-risk standard that is expensive to implement and may make them look bad, while indexers and proxy advisors also don’t want rules that would make their proprietary methods for ranking ESG investments far less valuable. Investors who stand to benefit from accurate, comparable climate-risk and ESG disclosures could end up with less than expected despite the promising proposed rules.