Improving CSR and ESG Disclosures: Alternatives and Suggestions for Securities Law Reforms

Abstract

There is ever-increasing investor interest in corporate social responsibility (CSR) generally and environmental social governance (ESG) in particular. Investors’ desires have triggered increased corporate ESG disclosures. As pressure for ESG-related disclosures continues to rise, there is increasing pressure on the SEC to support enhanced ESG disclosures. Notwithstanding many calls for mandatory ESG disclosures, the SEC has not implemented such a requirement. Instead ESG disclosures are voluntary. Voluntary ESG disclosures are common but to a large extent are marred by a lack of standardization in ESG data methodology. The increasing investor interest in ESG have led publicly held companies to take various approaches in framing their ESG disclosures. Many observers have asked the SEC to take a more active role with respect to ESG disclosures. Some observers call for mandatory ESG disclosures. To date, the SEC’s approach has been limited to providing guidance for companies electing to make ESG disclosures. This article analyzes the various ways in which the SEC could mandate or encourage better ESG disclosures. The article concludes that regardless of whether the SEC imposes mandatory disclosures or continues its voluntary approach, the SEC should a adopt a safe harbor rule. A safe harbor rule would encourage ESG disclosures while at the same time limiting but not eliminating the risk of liability for defective ESG-related disclosures. The article begins with a description of the current state of ESG disclosures. This is followed by a brief overview of the securities laws’ disclosure obligations. The article then explains materiality – a concept that is the lynchpin of the securities laws’ disclosure requirements. This is followed by exploration of the potential ways to enhance CSR and ESG disclosures including the advisability of mandating disclosure or taking additional steps to encourage voluntary disclosure. Specifically, the article suggests that a safe harbor rule would be an important step in improving ESG disclosures.