SEC Chairman Jay Clayton reiterated his view that the commission’s disclosure requirements should focus on “the material information that a reasonable investor needs to make informed investment and voting decisions.” His views come as the agency’s investor advisory panel explores whether the SEC should require a standardized set of disclosures on environmental, social, and governance (ESG) matters that business groups dismiss as non-material to a reasonable investor.
SEC Chairman Jay Clayton reiterated his view that the commission’s disclosure requirements must be rooted on the concept of materiality.
“I believe our disclosure rules and guidance, and our issuers, should focus on the material information that a reasonable investor needs to make informed investment and voting decisions,” Clayton said during a telephone meeting of the commission’s Investor Advisory Committee (IAC) on February 6, 2019.
His remarks come as the investor advisory panel has been discussing whether public companies should be required to disclose information concerning environmental, social, and governance (ESG) matters in a standardized format. But Clayton has previously said that he does not believe there should be a disclosure requirement on ESG issues because each company has its own unique set of facts and circumstances that may not neatly fit within a standard framework.
Clayton’s views on sustainability and ESG disclosures come as investors increasingly believe the information—such as the effect of a company’s operations on the environment or spending on political activities—is material to investing decisions and shareholder votes. Many large companies provide ESG disclosures voluntarily, but investor advocates say the information that is provided voluntarily is incomplete and inconsistently presented.
Clayton said he bases his views about materiality on the concept defined in 1976 by Supreme Court Justice Thurgood Marshall in TSC Industries, Inc. v. Northway, Inc. that said, “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote… Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
Moreover, Clayton said the disclosure framework should be set up so that information can be compared “as demonstrated by our commitment to U.S. GAAP.” The disclosure requirement should also be flexible, he said, because “requirements that are too rigid can lead to superfluous and, in some cases, misleading disclosure.
Further, he said the framework should promote efficiency “as the question generally is not rule or no rule, but rather what rule is most effective with the least cost. In addition, he said the framework should be responsible “as rules have little long-term value if they cannot be effectively monitored and enforced.”
He added that the SEC’s disclosure requirements and guidance must evolve over time to reflect the changing market or industry environments while being true to the core principles of the disclosure framework.
Current disclosure requirements date back to a time when companies relied significantly on plant, property, and equipment to drive value, Clayton. In contrast, “Today, human capital and intellectual property often represent an essential resource and driver of performance for many companies,” he said. “This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.”
Moreover, he said each industry, and even each company within a specific industry, has its own human capital circumstances. For example, the material human capital information for a manufacturer is different from that of a biotech company, which is yet different from that of a large healthcare provider. The human capital considerations for a carmaker are different from that of a house builder.
“Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies,” Clayton explained. “Instead, I think investors would be better served by understanding the lens through which each company looks at their human capital. Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? I have heard this and similar questions on earnings conference calls and in other investor settings.”
Clayton’s views are likely to be welcomed by business groups who oppose efforts to add disclosure rules about social and environmental issues. They want the SEC to focus on providing material information to the average investor and not cater to what they call special interest groups. In their view, sustainability information is specialized data that is not relevant to most investors and has nothing to do with financial performance.
The IAC held a telephone meeting because it had to cancel an in-person quarterly meeting for early 2019 following the partial government shutdown that lasted from late December 2018 to late January 2019.
The panel’s next meeting is tentatively set for July. But “there’s been talk of possibly scheduling a meeting before the July meeting, but I don’t know whether a decision has been made on that,” said IAC member Barbara Roper, director of investor protection with the Consumer Federation of America. “I imagine it will depend at least in part on whether we can find a time that works with enough IAC members’ schedules.”
