In June 2017 the European Union passed the EU Accounting Directive for Non-financial Information. It was implemented Member States in 2018. This law “requires large companies to disclose certain information on the way they operate and manage social and environmental challenges” on an annual basis. The law only applies to “large public interest companies with more than 500 companies.” All total it affects around 6,000 companies. The purpose of the law is to help “investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business.” It is quite flexible in its application in that it does not prescribe where the reporting should be done (e.g., the annual report or a sustainability report) or which frameworks and standards to use, of which there are many. The investment community has been supportive of this law, if anything feeling that it doesn’t go far enough in providing comparable information across companies in the same way they get information on financial performance based on accounting standards.

A little over two years later on July 12, 2019 the U.S. House Financial Services Committee rejected similar reporting in the U.S. due to opposition from Republican members. The proposed legislation would require the Securities and Exchange Commission to write disclosure rules on environmental, social, and governance (ESG) issues. To date the SEC has done very little in this regard. Reflecting the profound misunderstanding many members of the Republican party have about the importance of ESG disclosure to investors, Michigan Republican representative Bill Huizenga stated that “Mandatory ESG disclosures only name and shame companies as well as waste precious company resources. Mandating these disclosures is only doing more harm than good.” I also enjoy the irony of ideological arguments like these from people who accuse those in favor of ESG disclosure to be acting out of political considerations. If that was the case, why are an increasing number of companies, including those in the U.S., doing voluntary ESG reporting because they believe it is to their benefit to do so? And why are so many mainstream investors asking for this information in more comparable form?

House of Representatives | GETTY

And, to take this out of political arguments, let’s remember that “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The SEC further states that all investors “should have access to certain basic facts about an investment prior to buying it, and so long as they hold it” and to ensure that this happens “the SEC requires public companies to disclose meaningful financial and other information to the public.” What is at issue here is whether “other information” is ESG information and whether it’s disclosure should be required. In the case of financial information, the SEC in its very early days decided in favor of mandated financial reporting according to a set of accounting standards. In the U.S., these standards are set by the Financial Accounting Standards Board (FASB) with most of the rest of the world following International Financial Reporting Standards set by the International Accounting Standards Board.

I welcome a well-informed debate about whether ESG disclosures should be mandated and, if so, to a set of standards. My Oxford Said Business School colleague, Professor Richard Barker, and I have written about this in “Should FASB and IASB be responsible for setting standards for nonfinancial information?” This paper formed the basis of a robust and constructive debate at The Oxford Union featuring, among others, Harvey Pitt, former Chairman of the SEC, and Bob Herz, Former Chairman of FASB. Good arguments can be made for mandated ESG reporting according to some set of standards through regulation as well as for letting market forces determine the extent and type of this reporting by companies.

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