Corporate Governance

Shearman & Sterling LLP 36 | The Rise of the Green Loan Market United States A criticism of the current U.S. green and ESG disclosure practice is that, absent regulatory requirements or at least SEC guidance, there is little uniformity in either the form or substance of reporting among issuers. Some issue robust stand-alone reports extraneous to their SEC-required filings while others include ESG disclosure in their annual reports or other filings required by the Securities Exchange Act of 1934. Some issuers adhere to third-party standards such as the Global Reporting Initiative while others have adopted additional disclosure policies. Still, other issuers do not report on their own but rather reply to surveys requested by ESG data providers, which in turn provide ESG information or scoring systems to investors. Larger or better financed companies are often in a better position to respond to these surveys. Thus, one unintended result can be that smaller companies obtain a lower ESG "score" in these surveys, potentially negatively impacting their stock price and their ability to access capital. Motivated by the market confusion caused by a lack of consistent and comparable data, on May 14, 2020, an SEC subcommittee formally called on the SEC to develop rules for green and ESG disclosure. 2 The subcommittee noted that "investors consider certain ESG information material to their investment and voting decisions, regardless of whether their investment mandates include an "ESG-specific" strategy…" and "our work has informed us that this information is material to investors regardless of an [i]ssuer's business line, model or geography, and is different for every issuer." Despite the materiality of green and ESG considerations to investors across industries and "… despite a plethora of data, there is a lack of material, comparable, consistent information available upon which to base some of these decisions." The subcommittee was also motivated by: (1) a belief that issuers should provide material green and ESG information directly to the market for purposes of investment and voting decisions, as opposed to data providers gathering information from sources other than issuers themselves; (2) a determination to "level the playing field" between large companies that can better manage the current ad hoc system with its plethora of data purveyors and survey providers and smaller companies; and (3) a recognition that "[i]n time, without the availability of reliable ESG- related material information for all [U.S.] [i]ssuers, capital could be redirected by investors with their own sets of mandated ESG duties to companies outside the [United States] that are required to report ESG data pursuant to disclosure obligations of non-[U.S.] regulators, rendering [U.S.] [i]ssuers at a distinct disadvantage to access future international capital." To date, there have been no substantial follow-up efforts by the SEC, and the ad hoc system that green market participants must navigate, including with respect to ESG disclosure, remains. 2 SEC, "Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure," https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf (May 14, 2020).

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