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July 31, 2009

Socially Responsible Investors Welcome Signs that the SEC is Considering Mandatory ESG Reporting
    by Robert Kropp

The Social Investment Forum responds to questions from SEC commissioners on mandatory ESG reporting with letter, and the first meeting of the SEC's Investor Advisory Committee includes ESG reporting on its agenda. -- The formation in June of an Investor Advisory Committee by the Securities and Exchange Commission (SEC) was welcomed by many in the Socially Responsible Investing (SRI) community as another sign that the Commission, under Chairman Mary Schapiro, intends to honor its original mission of protecting the interests of investors.

On July 21, one week before the first meeting of the Investor Advisory Committee was to be held, more than 50 member organizations of the Social Investment Forum (SIF), a membership association dedicated to the practice and growth of SRI, wrote to Chairman Schapiro, detailing for her what the signatories believe constitutes effective mandatory corporate reporting on environmental, social, and governance (ESG) issues.

The ESG Letter to the SEC from SIF members responded to questions from the SEC asking "SIF to frame what mandatory ESG disclosure should look like." The meetings between SIF members and the SEC grew out of a January, 2009 letter to then President-elect Barack Obama, which included mandatory ESG reporting as a top priority for investors. spoke with Lisa Woll, the Chief Executive Officer of SIF, who said, "We met with several SEC commissioners early in the Obama administration with our transition document, which included mandatory ESG disclosure, and they asked us how they would do that. We spent four months putting the letter together, which explains why the US needs better disclosure."

According to the ESG letter, "There is increasing demand from international investor and accounting bodies for corporate sustainability reporting." The letter points to the growing number of signatories to the United Nations' Principles for Responsible Investment (PRI) as indicative of an increasing demand. Since its launch in 2005, the PRI has grown to include more than 560 signatories with more than $18 trillion in assets under management.

Among the principles to which PRI signatories commit are incorporation of ESG issues into investment analysis and decision-making, incorporation of ESG issues into shareowner policies and practices, and support for disclosure on ESG issues by companies in which signatories invest.

SIF's ESG letter states, "The present global economic crisis has made it readily apparent that our existing system for corporate reporting has failed shareholders. We believe that robust sustainability reporting could have mitigated some of the impacts of the financial crisis." SIF requested that the SEC respond to the growing call among investors for ESG disclosure by requiring "issuers to report annually on a comprehensive, uniform set of sustainability indicators comprised of both universally applicable and industry-specific components."

The letter recommended that the SEC define mandatory ESG reporting according to Global Reporting Initiative (GRI) reporting guidelines. The GRI has developed the world's most widely used sustainability reporting framework. In March, 2009, the GRI issued The Amsterdam Declaration on Transparency and Reporting, which called on governments to introduce "policy requiring companies to report on ESG factors or publicly explain why they have not done so."

On July 15, the GRI stated that over 1,000 organizations worldwide had issued sustainability reports based on its guidelines in 2008, the highest number ever recorded. However, companies in the major stock market indices reporting on sustainability performance using the GRI framework are still in the minority. Only 13% of companies listed in the S&P 500 do so.

Woll said, "GRI reporting is the most utilized international reporting framework. We felt that GRI was the single best way for the SEC to move to expand ESG reporting, by linking it to an existing standard."

At the first meeting of the SEC's Investor Advisory Committee, held on July 27, the need for improved sustainability reporting was voiced by members. In fact, in a Briefing Paper issued by the SEC in advance of the meeting, issues pertaining to ESG disclosure were described at length. One question raised by the SEC in the briefing paper was, "If additional disclosure in these areas would be useful to investors, should the Commission require additional disclosure on these matters by revising its forms and regulations?"

According to a press release issued by the Investor Advisory Committee following the meeting, the issue of proper disclosure was framed in the following way: "Does the information that investors currently receive both before making an investment decision and afterwards meet their needs, and if not, what changes are necessary to ensure that investors have the information that they need, when they need it?"

Woll said, "Sustainability reporting was on the agenda of yesterday's meeting, and we feel confident that this is now an issue that the SEC is willing to look at."

Woll continued, "We feel there is an openness at the SEC to issues that SRI investors have cared about for a long time. For SRI investors, many of the issues that are of concern to us are being given thoughtful consideration by the SEC for the first time."

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