The founder of Sustainability Accounting Standards Board (SASB) during an event last week criticized SEC Commissioner Allison Herren Lee’s stance on materiality.
“I am a huge advocate, dedicated my career to sustainability and advancing this field. But I think that the speech that commissioner Allison Herren Lee where she essentially said it doesn’t matter if it’s material, yes, the SEC can … do rulemaking, I think that sets the profession back two decades because we have spent 20 years trying to understand how these issues are material and how to talk about to investors,” Jean Rogers, founder and former CEO of SASB, said during a virtual fireside chat hosted by the U.S. Chamber of Commerce on August 4, 2021. She left the standard-setter in 2018 after the board published 77 industry standards.
In general, materiality means companies should disclose information that a reasonable person would find important in the total mix of information to make an investing or voting decision. And the definition in the securities laws are based on such Supreme Court decisions as TSC Industries v. Northway and Basic v. Levinson.
Lee’s Views
SEC Commissioner Lee, a big supporter of environmental, social, and governance (ESG) reporting, in May described what she believes are myths surrounding the concept of materiality that public companies use in deciding what to disclose to investors. (See SEC Commissioner Lee Says Corporate Political Spending Information can be Material in the May 26, 2021, edition of Accounting & Compliance Alert.)
Lee shared her views as the SEC is considering ESG disclosure rulemaking.
One of the myths she said is that the SEC disclosure requirements must be strictly limited to material information.
“However, this is affirmatively not what the law requires, and thus not how the SEC has in fact approached disclosure rulemaking,” Lee said in a speech on May 24. “Indeed our statutory rulemaking authority under Section 7 of the Securities Act of 1933 gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors. That statutory authority is not qualified by ‘materiality.’”
“The idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in our rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG,” Lee added.
Rogers’s Counter Argument
Rogers called Lee’s arguments problematic.
“You are now saying there is no distinction between the noise and material information that’s out there and what’s material to investors,” she said. “I think that’s the most valuable and wonderful thing about the U.S. capital markets. It’s based on that principle, and it’s a really slippery slope [to say] that doesn’t matter. We learned a lot, and it does matter.”
To better illustrate her point, she said the state of the ESG industry is different than when the SASB was established in 2011.
Today, there is a glut of ESG information—not because of standard-setters but because of the market opportunity presented to ESG information brokers and raters.
Rogers rattled off some data: Sustainalytics looks at 300 indicators and 1,300 data points; Refinitiv with 450 data points; Arabesque looks at 150 million data points and scores 250 metrics every day; S&P with 1,000 ESG data points; and Bloomberg with 2,000 data points.
“Because we have that sea of information, what we’ve effectively done is disconnect what gets measured from what gets managed,” Rogers said. “Now we have what gets measured gets disclosed, gets reported. Now it’s not being managed. Nobody is managing 1,000 ESG data points or issues.”
The problem with this is there is no clarity.
Investors “don’t have clarity on what is material and what companies are actually managing versus what they are disclosing and reporting out in all of these various different channels,” she said. “That is very confusing for investors and problematic because you are not able to understand what is decision useful, how to make those investment decisions.”
This article originally appeared in the August 9, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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