Right now, big companies don’t disclose much to shareholders and potential investors about their exposure to macro problems like the environment or human rights.
So-called “ESG” (short for Environmental, Social and Governance Risk) reporting is often seen as too soft or broad to warrant disclosure. Most companies leave topics like the potential impact of climate change and working in a repressively-run country on their operations out of SEC filings.
That may change, and it’s a good thing, argues Lisa Woll, CEO of the Social Investment Forum.
CSM: The good news is that the SEC, under new leadership, is sending signals that it is open to considering better disclosure. The first meeting of the SEC Investor Advisory Committee even included discussion on whether more disclosure is needed, particularly in the areas of environment and climate change. While this is an important step, climate risks are just one of many threats to a company’s sustainability.
Disclosures would promote longer-term thinking by investors and corporations, making it possible to detect destructive business practices such as predatory lending, which affects us all.
Currently, the SEC doesn’t require disclosing things like human rights abuses associated with oil drilling in Sudan, the potentially toxic nanotechnology used in sun-tan lotion, and growing concerns about climate-related water shortages in the southwestern U.S.
Some of these issues — like the lack of water — can have a tangible affect on a company’s operations. But even if there’s a more tenuous connection to a problem, social activist campaigns can quickly make a business’ association with a dirty practice a major issue. Think of the largely successful protests against using sweatshops, selling blood diamonds or investing in apartheid South Africa. More recently, look at the fight over compensation and disclosure on Wall Street.
Of course, some demands for transparency have a political agenda that might be at odds with investor interests. But if it’s agreed that proper disclosure is a critical part of ensuring the efficiency of markets, then it’s probably a good idea to force companies to discuss their exposure to macro problems.
It’s time to broaden the definition of disclosure. The world — and investors — will be better for it.
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