Environmental, social, and governance, or ESG, is a framework increasingly used to measure factors beyond the balance sheet that impact the financial performance and long-term sustainability of a corporation.

That’s why, this past March, the Bipartisan Policy Center, together with S&P Global, announced a new ESG Task Force to inform policymakers about the ESG debate, discuss how companies are responding, and lay out the issues that are likely to demand their attention moving forward.

Comprised of industry leaders that bring real world experience and a shared commitment to advancing and implementing ESG goals, this task force serves as an objective, bipartisan forum to discuss pertinent issues while also helping inform public debate on how best to proceed. We began by looking at some basic questions that had yet to be adequately answered; how ESG is defined, how ESG information is disclosed, how that information is used, among others.

As investors are increasingly considering ESG factors in their investment decision-making, this has led to an increased need for data, analysis, investment products, and standards, which has ultimately led to a series of complex regulatory questions. There are concerns among many about “greenwashing,” too, and the demand for definitional clarity among policymakers is high.

While ESG efforts have been underway for years in the private sector, government – and particularly Congress – has relatively little experience working on these issues. The Biden administration has already demonstrated interest in a larger government role in guiding, regulating, and potentially mandating a range of ESG frameworks and obligations. Additionally, U.S. companies already have an eye toward Europe, which has moved farther down the road of new corporate governance rules.

Additionally, the Biden Administration is likely to push for increased government action on ESG issues, including mandating disclosure through the SEC. Congress also seems poised to act on a wide range of ESG issues. These factors add an urgency to help properly define ESG for policymakers, companies, stakeholders, and the investment community.

However, there is confusion surrounding the role ESG plays and how it can help companies mitigate risk and meet the increasing demands of their shareholders. The corporate response to the COVID-19 crisis and subsequent economic downturn has brought these issues even more to forefront.

BPC is uniquely positioned to create the collaborative, bipartisan forum required for substantive discussion of these complex issues, and we continue to work on a variety of ESG-related topics, including climate concerns, ESG-related disclosures, ESG rating and ranking systems, and shareholder proposals.

–Dane Stangler, Director of Strategic Initiatives, Bipartisan Policy Center

A growing number of companies routinely produce Environmental, Social and Governance (“ESG”) information. And for good reason: employees, investors, community partners, and other stakeholders want to better understand how companies are factoring ESG considerations into their corporate governance decision-making.

Today, there is not a standard ESG playbook because the challenges and opportunities in ESG vary widely depending on a company’s industry, footprint, and investor base. What is a meaningful environmental issue for one company can be entirely irrelevant for another.

ESG disclosures are sensitive and responsive to varying circumstances, making them different from the kinds of disclosures mandated by the government that primarily focus on financial performance, financially quantifiable risks, governance, and legal compliance. Revenue, expenses, and conflict of interest disclosures are material no matter what a company does, whereas what ESG metrics could be determined to impact investment decisions can vary significantly.

Materiality has been at core of the U.S. approach to mandatory investor disclosures for decades, because it ensures that investors are provided with decision-useful information and are not, in the words of the Supreme Court, “bur[ied] in an avalanche of trivial information.” The materiality standard also keeps corporate disclosure tied to the economic return and long-term performance of companies.

For years, the U.S. Chamber has worked closely with public companies and investors to promote a system of market-based disclosure standards for ESG and, in 2019, released a set of best practices for disclosing material ESG information.

But now, the Securities and Exchange Commission (SEC) may uproot the voluntary and discrete disclosure system to take a vastly different approach, mandating a full range of “one-size fits all” ESG disclosures. If done poorly, such a system could make ESG disclosures less meaningful for stakeholders and for responsible corporate governance.

First, the type of disclosure mandate being contemplated would put the government at the center of decisions about what information is important and meaningful for investors. This approach would go against what SEC Chair Gary Gensler himself said during his confirmation hearing: “it’s the investor community that gets to decide what is material to them. It’s not a government person like myself.”

Second, because companies can be held liable for what they say in SEC disclosures, a mandatory, top-down rule could result in ESG disclosures that are littered with legal caveats and turns of phrase that make it nearly impossible to understand what a company intends to achieve through its ESG goals. Ironically, a mandatory SEC disclosure may end up providing less information to stakeholders because companies may be forced to communicate less openly and less clearly about future developments.

For example, many companies have made important commitments around reducing carbon emissions, but achieving these goals often relies on innovation in market segments that a company does not control. Because these company goals look to the future, attaching liability to them could actually discourage companies from making internal strategies available to stakeholders, shareholders, and the public.

A survey conducted earlier this year by the U.S. Chamber and seven other organizations found that public companies have significantly increased the amount of climate change information they disclose: 59% say they are disclosing more information regarding climate change than they were a decade ago, while nearly two-thirds regularly communicate with their shareholders about the evolving risk of climate change. A “government-knows-best” rule could undermine this progress.

The Chamber will continue to work with public companies, investors, the SEC, and Congress on these critical issues to foster a system of corporate disclosure that is based on materiality and the needs of the investor while also ensuring that companies share important ESG information with a broad range of stakeholders. Such a system will help maintain U.S. leadership in global capital markets for years to come.

– Tom Quaadman, Executive Vice President of the U.S. Chamber Center for Capital Markets Competitiveness and Senior Advisor to the President and CEO