Organizations need more transparency and accountability regarding the way they address environmental, social, and governance (ESG) factors that could destabilize financial markets, argues a new report from the Global Financial Markets Center at Duke Law. Climate change, systemic racism and wealth inequality are among the issues that pose direct and immediate threats to capital markets, and the SEC should consider taking steps to ensure that companies operating in the US accurately identify and disclose the risks presented by these threats, the report states.
Risks specifically named in the report include disruption of supply chains, strained work forces, sudden and widespread asset deflations, and the obsolescent of entire business models and industries.
According to the report, the SEC should:
—Restore public accountability to unregulated private markets;
—Require enhanced public ESG-related disclosures;
—Enhance stakeholder rights and engagement;
—Modernize expectations for investment fiduciaries;
—Promote integrity of ESG-related labeling of investment funds and products;
—Enhance oversight of credit rating agencies and index providers;
—Enhance auditing and accounting rules and enforcement;
—Revise its staffing and structure to prioritize ESG integration.
Investors are dissatisfied with the quality, consistency, and comparability of ESG disclosures, according to the report. Though a variety of ESG-disclosure regimes have been released by NGOs, the wide range of voluntary disclosure templates has led to inconsistent, incomplete, and inadequate disclosure practices. “Absent a government-mandated disclosure regime for ESG factors, investors and stakeholders remain unable to compare firms, assess ESG-related risks, and instill corporate accountability,” the report argues. “Ultimately, the SEC’s failure to mandate consistent and decision- useful disclosure of relevant ESG-related information has made it impossible to efficiently allocate capital towards a sustainable future.”
The report comes out in advance of a Feb. 25 House committee hearing on the threats climate change poses to companies and the US economy and the lack of information being provided about those risks.