Disclosing the right information can help investors to evaluate a company’s approach to sustainability and drivers of long-term growth, factors that have become increasingly important to a corporate success. Over the past several years, this topic become a focal point of the global business community.

On 23 June, FCLTGlobal hosted a webinar with Jay Clayton, the Chairman of the U.S. Securities and Exchange Commission, to discuss his views on the importance and role of such disclosures and provide thoughts on how companies, investors, and standard-setters can clarify and advance the development of appropriate disclosures. Mark Wiseman, the newly announced chair of AIMCo, hosted the discussion.

Chairman Clayton emphasized the differences among E, S, G and raised concerns around single point ESG ratings. He noted that forward looking ESG metrics should be “good faith estimates”.  And while it will be hard to match the precision of traditional  financial disclosures, historic ESG metrics could be audited. Overall, Chairman Clayton is an advocate of a principles-based approach – even at the risk of having varying disclosures from company to company.

Chairman Clayton noted the importance of thoughtful analysis of all types of disclosure: “If you take financial statements as your baseline, there are still many challenges in pulling together financial statements and making sure that they are comparable even across companies in the same sector. As an investor, you look at the assumptions that people make going into their financial statements, whether it’s in the financial sector or others. So, you don’t get away from those types of issues just by setting a metric,” said Clayton.

Chairman Clayton drew comparisons to the SEC’s response to COVID-19.

“There are no COVID metrics sitting on the shelf. Our Division of Corporate Finance did an unbelievable job in getting out guidance to issuers on how to communicate with the investment community […] What does that do to you operationally? How are you going to adjust your operations? What does that mean for your financial condition?” he said. “[We] have put out very robust guidance to help facilitate issuer investor communication around principles.”

Members of the audience expressed more desire for common metrics in a poll: 91% of respondents agreed that the crisis has highlighted the need for more quantitative, uniform disclosures that serve as leading indicators of success and are material to investment decision-making. In addition to these disclosures, 37% of respondents indicated that regulators should use the crisis as an opportunity to accelerate the adoption of more forward-looking disclosure metrics.

When the discussion turned to the issue of reporting and a pervasive short-term mindset among American investors, Chairman Clayton expressed optimism around potential solutions.

“We’re frustrated with the idea that people manage for the short term, that they manage for quarterly earnings and they have to try and meet their guidance. We’re looking at how to have our disclosure be for the longer-term investor and make sure that people feel that they can tell that longer-term story.” He continued, “Many investors believe that managing for quarterly guidance is not an effective management style, strategy, or perspective for the long term.”

Transparency from the top levels of an organization is a large part of effective ESG reporting, particularly in a principles-based system as Chairman Clayton proposes. Wiseman suggested that high-priority items taken under consideration by a company’s board should be discussed with investors. Chairman Clayton agreed and took it a step further, pointing out that matters of importance to the board are likely material to investors.  And Chairman Clayton emphasized that the SEC’s mandate is around investors in public companies, rather than other types of disclosures.

“As an overriding principle, matters that are rising to the board level should be reflected in the disclosure to the public,” the chairman said. Rather than requiring responses to idiosyncratic requests, “we have built our system around what’s material to an investment decision for what a reasonable investor would think.”

Clarifying what a ‘reasonable investor’ means, he continued, “People sometimes think that when I say that, that just means financial. Let me be clear. The reasonable investor looks at qualitative, quantitative, non-financial, and financial metrics.”

Revisiting the topic of alternative data, the chairman also pointed out that there is a vast amount of company data that investors are interested in. Having more disclosure directly from the issuer can ensure that alternative and company data are in sync over time.

“We can substantially improve quarterly reporting, and there’s lots of information out there […] So, if people are looking monthly sales data and they’re projecting how a company is doing, you want either a monthly or quarterly check-in from the company. Otherwise, the market expectations in the companies are going to get out of whack.”

To conclude the discussion, Chairman Clayton also took several questions from callers on a range of issues.

There’s often a tradeoff between liquidity and long-term investing. The SEC is often worried about the ability to trade. Is it also concerned with encouraging long-term investing?

“My favorite investor is that long-term retail investor who’s building wealth over time. We hope we give them low cost, transparent access to an array of investment opportunities. But when you have 50 million households at any one point, you’re going to have a lot of them who need liquidity. And so we do need liquidity in our markets even to serve the long-term investors.”

Are investors long-term enough?

“I think we have a lot of long-term investors who are very important, not only to the markets but to the economy at large. The confidence to tie your money up for 10, 20, 30 years – and that a large section of our market is willing to do that – is of tremendous value from a capital allocation standpoint. I think what you may be saying is ‘is short-term investing activity driving too much of today’s market prices?’ That’s always a worry. But do we have enough people to take the other side of that kind of volatility? The best way to deal with that is transparency.”

Given that regulatory scrutiny is often raised as an impediment to non-traditional metrics disclosure, would the SEC consider a safe harbor for certain metrics?

“We’ve provided a safe harbor for forward-looking statements, and I do think that that’s an important, safe harbor. We want to encourage people to provide that kind of forward-looking information that helps people make decisions. And in the area of sustainability, I’m very open to a dialogue around encouraging the use of the safe harbor in order to get more information out to investors. I think it’s absolutely critical.”

Thank you to Chairman Clayton and Mark Wiseman for joining us for a fascinating discussion. Developing these key areas further will be crucial as we continue our mission to rewire capital markets toward the long term. To learn more about the future of disclosures, sustainability, and long-term investing, view more of our resources or follow FCLTGlobal on social media @FCLTGlobal.