ESG disclosures by companies fall short, according to GAO

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Disclosures by public companies of nonfinancial information, such as environmental, social and governance (ESG) issues, aren’t always “clear or useful,” according to a report released Monday by the Government Accountability Office.

The GAO report noted that ESG information could be an indicator of its long-term financial performance, and investors have been asking companies to disclose more about ESG topics in recent years, For the report, the GAO reviewed disclosures from 32 companies. “Most included some of this information, but it wasn’t always clear or useful,” said the report. “For example, it was hard to compare climate or resource-related information when companies used different calculation methods or reported results in different units of measurement.”

Most of the institutional investors interviewed by the GAO (12 out of the 14) said they seek information on ESG issues to gain a better understanding of the risks that could affect company financial performance over time. Investors use such disclosures to monitor companies' management of ESG risks, inform their vote at shareholder meetings, or make stock-purchasing decisions. But the investors interviewed by the GAO want to see more ESG disclosures to address gaps and inconsistencies in companies' disclosures that limit their usefulness.

For the report, the GAO reviewed annual reports, 10-K filings, proxy statements, and voluntary sustainability reports for the 32 companies. It found disclosures across many ESG topics but it also discovered examples of the kinds of limitations noted by investors. Twenty-three of the 32 companies offered disclosures about more than half of the 33 topics GAO reviewed, with board accountability and workforce diversity among the most reported topics, but human rights issues were the least reported topic.

Disclosure on a particular ESG topic typically depends on its relevance to a company's business. Most companies provide information related to ESG risks or opportunities that’s specific to the company, but some didn’t include this type of company-specific information.

Companies tend to use different methods and measures to disclose quantitative information, and that can make it hard to compare the disclosures across companies. For example, companies varied in their reporting of carbon dioxide emissions.

There are some policy options available to improve the quality and usefulness of ESG disclosures, ranging from legislation and regulatory actions, perhaps by the Securities and Exchange Commission,that would require or encourage such disclosures. There are also private-sector approaches, such as using industry-developed frameworks. The Sustainability Accounting Standards Board, the Global Reporting Initiative and the International Integrated Reporting Council are among the groups that have developed such standards.

These options pose important trade-offs, however, according to the GAO. While new regulatory requirements could improve comparability across companies, voluntary approaches can offer flexibility to companies and limit potential costs. The SEC already requires public companies to disclose material information — which can include material ESG information — in their annual 10-K filings and other periodic filings.

“The Commission’s approach to these issues is largely rooted in materiality,” wrote SEC chairman Jay Clayton (pictured) in response to the report. “As you have made clear, our principles-based disclosure regime emphasizes materiality and is focused on requiring public companies to provide information that a reasonable investor would consider important in making informed investment and voting decisions. This approach is time-tested — over 85 years ago, Congress set forth materiality as the foundational principle underlying public company disclosure requirements. This approach has served investors and our capital markets well over the intervening decades as our economy and our markets have evolved and I firmly believe it can be trusted in the decades to come.”

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