Hijacking SEC Disclosure
Hijacking SEC Disclosure
Last week, a group of institutional investors, including public pension funds (which manage retirement money for public school teachers and other government workers), wrote to the Securities and Exchange Commission (SEC) to share their priorities for the agency. Their agenda includes directing the SEC to “[e]nsure that relevant environmental, social, governance (otherwise known as sustainability issues) and diversity reporting is integrated into financial reporting frameworks.” This directive is likely to find receptive ears at the SEC, which recently issued guidance related to climate change disclosures.
Among other things, the SEC hinted that companies that are voluntarily “providing information to their peers and to the public about their carbon footprints and their efforts to reduce them” and their “organizational commitment to sustainable development” may be required to include this information in future SEC filings. Companies already are required to make extensive disclosures on issues that are relevant to investors, including environmental and governance issues. Additional disclosure that satisfies the curiosity of a particularly vocal interest group could actually divert investors’ attention from the disclosures that really matter to them. The SEC’s focus should not be shifted from protecting investors to advancing whatever the most popular social goals of the day happen to be.
Social goals that are meaningful to one investor may not be significant to another. One of the signatories of the letter, the Connecticut Retirement Plans and Trust Funds, is authorized to take into account not only the interest of its participants and beneficiaries, but “social, economic and environmental implications of investments.” Another signatory, the California State Teachers’ Retirement System, focuses not only on profit factors, but on avoiding “promot[ing], condon[ing], or facilitat[ing] social injury.” Social injury is defined as “when the activities of a corporation undermine basic human rights or dignities,” including “equal employment,” “equal access to safe and decent housing,” and “equal access to basic services, including medical care, transportation, recreation, and education.” Corporate boards of directors cannot possibly balance all of those social goals, which may even clash with one another.
Public companies should be allowed to focus on maximizing the value of shareholder investments. Individual shareholders, on the other hand, can take what they earn from investing in companies and spend it on the causes that are important to them. SEC disclosure should focus on helping investors and potential investors understand the financial health of the company, not the size of its carbon footprint.