Public Companies: Disclosure of Environmental, Social, and Governance Factors and Options to Enhance Them

Investors are increasingly asking public companies to disclose information on ESG factors to help them understand risks to the company's financial performance or other issues, such as the impact of the company's business on communities. The Securities and Exchange Commission requires public companies to disclose material information—which can include material ESG information—in their annual 10-K filings and other periodic filings.

GAO was asked to review issues related to public companies' disclosures of ESG information. This report examines, among other things, (1) why investors seek ESG disclosures, (2) public companies' disclosures of ESG factors, and (3) the advantages and disadvantages of ESG disclosure policy options.

GAO analyzed 32 large and mid-sized public companies' disclosures on 33 selected ESG topics. Among other criteria, GAO selected companies within eight industries that represented a range of sectors in the U.S. economy and selected ESG factors that were frequently cited as important to investors by market observers. GAO also reviewed reports and studies on ESG policy proposals and interviewed 14 large and mid-sized institutional investors (seven private-sector asset management firms and seven public pension funds), 18 public companies, 13 market observers (such as ESG standard-setting organizations, academics, and other groups), and international government, stock exchange, and industry association representatives.

Most institutional investors GAO interviewed (12 of 14) said they seek information on environmental, social, and governance (ESG) issues to better understand risks that could affect company financial performance over time. These investors added that they use ESG disclosures to monitor companies' management of ESG risks, inform their vote at shareholder meetings, or make stock purchasing decisions. Most of these institutional investors noted that they seek additional ESG disclosures to address gaps and inconsistencies in companies' disclosures that limit their usefulness.

GAO's review of annual reports, 10-K filings, proxy statements, and voluntary sustainability reports for 32 companies identified disclosures across many ESG topics but also found examples of limitations noted by investors. Twenty-three of 32 companies disclosed on more than half of the 33 topics GAO reviewed, with board accountability and workforce diversity among the most reported topics and human rights the least. Disclosure on an ESG topic may depend on its relevance to a company's business. As shown in the figure, most companies provided information related to ESG risks or opportunities that was specific to the company, though some did not include this type of company-specific information.

Additionally, differences in methods and measures companies used to disclose quantitative information may make it difficult to compare across companies. For example, companies differed in their reporting of carbon dioxide emissions.

Policy options to improve the quality and usefulness of ESG disclosures range from legislative or regulatory action requiring or encouraging disclosures, to private-sector approaches, such as using industry-developed frameworks. These options pose important trade-offs. For example, while new regulatory requirements could improve comparability across companies, voluntary approaches can provide flexibility to companies and limit potential costs.

Investors are increasingly asking public companies to disclose  information on environmental, social, and governance (ESG) factors to  help them understand risks to the company’s financial performance or  other issues, such as the impact of the company’s business on  communities. Examples of ESG factors include climate-related impacts,  investments in human capital, and the strength of a company’s data  security program. Some of the largest institutional investors in the United  States have announced that they take ESG factors into account to inform  their investment decisions and manage investment risks. For example, in  a recent letter to clients, executives of BlackRock, Inc., which manages  more than $6 trillion in investment assets, stated their view that ESG  investment options can offer investors better outcomes. This letter also  outlined plans to increase their focus on managing ESG-related risks  through how BlackRock constructs investment portfolios, designs  investment products, and engages with companies.

The Securities and Exchange Commission (SEC) requires public  companies to disclose material information—which can include material  ESG information—in their annual 10-K filings and other periodic filings.  SEC has issued interpretive releases to help explain to companies how  current disclosure requirements apply to particular ESG topics, such as  climate change. Third-party organizations have created voluntary  frameworks for companies to consider to improve the quality and  consistency of companies’ ESG disclosures. However, some investors  and market observers have continued to express dissatisfaction with the  quality and consistency of public companies’ ESG disclosures.

You asked us to review issues related to public companies’ disclosures of  ESG information. This report examines (1) why and how investors have  sought additional ESG disclosures; (2) how public companies’ disclosures  of selected ESG factors have compared within and across selected  industries; (3) steps SEC staff have taken to assess the effectiveness of  the agency’s efforts to review the disclosure of material ESG factors; and  (4) the advantages and disadvantages of policy options that investors and  other market observers have proposed to improve ESG disclosures.

To obtain information about how and why investors have sought  additional ESG disclosures, we reviewed relevant reports and studies by  academics, investment firms, and others. In addition, we conducted semi- structured interviews with a nongeneralizable sample of 14 institutional  investors:  four large private asset management firms (each with more than $1  trillion in worldwide assets under management as of December 31,  2018);  three mid-sized private asset management firms (each with from $500  billion to $1 trillion in worldwide assets under management as of  December 31, 2018);  three large public pension funds (each with more than $100 billion in  total assets as of September 30, 2018); and  four mid-sized public pension funds (each with from $40 billion to  $100 billion in total assets as of September 30, 2018).

To get a mix of regional perspectives, we incorporated geographic  location into our selection when possible. For example, we selected at  least one of the seven public pension funds from each of four U.S. census  regions (Northeast, South, Midwest, and West). To understand trends in  the use of shareholder proposals to promote improved ESG disclosure,  we obtained and analyzed proposals for a generalizable, random sample  of 100 public companies listed on the S&P Composite 1500 as of October  4, 2019.

To compare public companies’ ESG disclosures within and across  industries, we analyzed disclosures from a nongeneralizable sample of 32  companies across eight industries on eight ESG factors. We selected  ESG factors that were frequently cited as important to investors and  companies by a range of market observers, including ESG standard- setting organizations and academics. We selected the eight industries  because they represented a range of sectors of the U.S. economy (e.g.,  transportation, services, and manufacturing). By selecting four of the eight  largest companies in each industry, we arrived at 32 companies. We  reviewed companies’ recent regulatory filings (10-K and definitive proxy  statement), annual reports, and voluntary corporate social responsibility  reports to identify relevant disclosures on the selected ESG topics. In  addition, we conducted semi-structured interviews with representatives  from 18 of the 32 companies to obtain their perspectives on their ESG  disclosure practices.

To review SEC staff’s efforts related to ESG disclosures, we reviewed  relevant Division of Corporation Finance (Corporation Finance)  procedures. We also interviewed SEC officials and 15 review staff (six  attorneys, six accountants, and three branch chiefs) involved in  Corporation Finance’s oversight of public companies’ disclosures. To  identify relevant policy proposals to improve ESG disclosures, we  reviewed reports and public statements and comments from investors,  ESG standard-setting organizations, and other groups. In addition, we  reviewed reports and studies on international ESG disclosure  requirements to identify and obtain information about relevant policy  approaches implemented in other countries. We also interviewed  government officials in the United Kingdom and Japan and stock  exchange and industry association representatives from South Africa.  Finally, we conducted interviews with 13 market observers, including ESG  standard-setting organizations, academics, and representatives of  industry and investor groups to obtain their perspectives on issues and  policy options related to ESG disclosures. We selected these market  observers through studies and reports of companies’ ESG disclosures  that identified leading observers with subject matter expertise and through  referrals obtained during interviews for this study.

We conducted this performance audit from January 2019 to July 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The use of ESG factors has emerged as a way for investors to capture  information on potential risks and opportunities that otherwise may not be  taken into account in financial analysis. ESG factors like climate change  impacts and workplace safety may affect a company’s expected financial  performance and thereby its value to shareholders. See table 1 for  examples of ESG factors.

ESG standard-setting organizations were created to improve  transparency and consistency in companies’ disclosure of ESG  information. Several independent and nonprofit organizations have  created voluntary frameworks companies may use to disclose on ESG  issues, as shown in table 2. Frameworks are generally comprised of  single-issue categories that contain several specific disclosure topics  related to that category.

SEC rules and regulations generally require public companies to disclose,  among other things, known trends, events, and uncertainties that are  reasonably likely to have a material effect on the company’s financial  condition or operating performance, as well as potential risks to investing  in the company. SEC considers information to be material if there is a  substantial likelihood that a reasonable investor would consider it  important in making an investment decision in the context of the total mix  of available information. Public companies disclose information on an  ongoing basis through annual 10-K filings, quarterly 10-Q filings, and  definitive proxy statements, among other disclosure requirements.  Regulation S-K contains SEC integrated disclosure requirements for 10-K  filings and other periodic reports filed with SEC. Staff in Corporation  Finance are to selectively review 10-K filings for compliance with  requirements outlined in Regulation S-K and other applicable accounting  standards and form requirements. While federal securities laws generally  do not specifically address the disclosure of ESG information, Regulation  S-K’s disclosure requirements for nonfinancial information apply to  material ESG topics. Regulation S-K also includes prescriptive  requirements for disclosure of certain topics considered to be ESG topics,  such as board composition, executive compensation, and audit  committee structure.

Corporation Finance’s legal and accounting staff review filings through  seven offices organized by industry, and office managers assign different  levels of reviews to 10-K filings, such as full reviews (which include  financial and legal reviews) and financial-only reviews. The Sarbanes- Oxley Act of 2002 requires SEC to review the financial statements of  each reporting company at least once every 3 years, which informs,  among other factors, how Corporation Finance selects and determines  the extent to which 10-K filings are reviewed. In conducting these  reviews, Corporation Finance staff may provide comments to a company  to obtain additional information, clarification on the company’s disclosure,  or to significantly enhance its compliance with applicable reporting  requirements. Comments depend on the issues that arise in a particular  filing, and staff may request that a company provide additional information  to help them better evaluate disclosures.

SEC occasionally issues interpretive releases on topics of general  interest to the business and investment communities, which reflect the  Commission’s views and interpret federal securities laws and SEC  regulations. For example, in 2010, SEC issued the Commission Guidance  Regarding Disclosure Related to Climate Change, which described how  existing disclosure requirements could apply to climate change-related  information and how companies may consider climate disclosures in  required filings. In 2018, SEC also issued the Commission Statement  and Guidance on Public Company Cybersecurity Disclosures, outlining  how existing reporting requirements could apply to cybersecurity-related  risks and incidents. These interpretive releases do not establish new  reporting requirements. Instead, they identify items in existing laws and  regulations that may be most likely to require disclosure on these topics,  such as description of the company’s business and potential risk factors  that may affect the company.

Most Large Investors Told Us They Sought Additional ESG Disclosures to Better Understand and Compare Companies’ Risks Most Investors Said They Engage with Companies to Address Gaps or Inconsistencies in ESG Disclosures That Limit Their Usefulness

Institutional investors with whom we spoke generally agreed that ESG  issues can have a substantial effect on a company’s long-term financial  performance. All seven private asset managers and representatives at  five of seven public pension funds said they seek ESG information to  enhance their understanding of risks that could affect companies’ value  over time. Representatives at the other two pension funds said that they  generally do not consider ESG information relevant to assessing  companies’ financial performance. While investors with whom we spoke  primarily used ESG information to assess companies’ long-term value,  other investors also use ESG information to promote social goals. A 2018  US SIF survey found that private asset managers and other investors,  representing over $3.1 trillion (of the $46.6 trillion in total U.S. assets  under professional management), said they consider ESG issues as part  of their mission or in order to produce benefits for society.

Institutional investors we interviewed identified various ways they use  ESG disclosures to inform their investment decisions and manage risks  related to their investments.

Protecting long-term investments by monitoring companies’  management of ESG risks. Some investors with whom we spoke  noted that they primarily make long-term investments in passively  managed funds, which may prevent them from making investment  decisions based on ESG information. However, 10 of 14 investors  said that their focus on long-term factors that drive value leads them  to monitor or influence companies’ management of ESG issues to  protect their investments. Investors generally said they use ESG  disclosures to determine which ESG issues companies monitor and to  assess how companies manage these risks. Nearly all investors said  ESG issues can be important to a company’s operations and  performance over time. For example, seven of 14 investors said they  used ESG disclosures to identify companies that were less  transparent than their peers or appeared to be outliers in their  industries, such as having less board diversity than their peers.  Investors then engaged with these companies to discuss their risk- management strategies, encourage disclosure on ESG issues, or  provide information about what kind of disclosure they would find  useful.

Informing shareholder votes. Most investors with whom we spoke  said they use ESG information to inform their votes as shareholders at  annual shareholder meetings, either through a proxy advisory firm or  independently. Specifically, nine of 14 investors said that ESG  information informs how they vote on directors’ nominations to the  board and other proposals at public companies’ annual meetings. For  example, representatives from two large public pension funds said  they withhold votes for directors if they determine that a company’s  board had not effectively disclosed issues, such as climate risk or  executive performance metrics.

Creating ESG funds or portfolios. Five of 14 investors we  interviewed said they created ESG-focused investment funds or  portfolios with goals such as promoting social responsibility and  environmental sustainability. In creating these funds and portfolios,  investors generally review companies’ ESG disclosures to determine  which companies to include or exclude from these funds or portfolios.  For example, two private asset managers said they created ESG  funds or portfolios to attract investors focused on social goals, such as  faith-based investors, while representatives from one pension fund  said they had worked with an asset manager to create a low- emissions index intended to support the Paris Agreement’s goals.

Divesting. Some investors we interviewed said they typically would  not divest based on a company’s ESG disclosures, and three said that  ESG information could lead them to divest. A mid-size asset manager  noted that the firm works with companies to improve their disclosures  rather than divest. Conversely, representatives from one mid-size  pension fund said they found that buying or selling shares is a more  efficient method for changing corporate behavior than the lengthier  strategy of engaging companies in dialogue. Additionally, a large  asset manager said that its portfolio managers sell shares if a  company’s ESG performance or response to engagement is poor.

Although some studies report that the quantity and quality of ESG  disclosures generally improved in the last few years, 11 of 14 investors  with whom we spoke said they seek additional ESG disclosures from  companies to address gaps and inconsistencies, among other issues.  Investors described challenges with understanding and interpreting both  quantitative and narrative disclosures.

Quantitative disclosures. Investors cited examples of  inconsistencies in companies’ quantitative disclosures that limit  comparability, including comparability among companies that disclose  on the same ESG topics. Specifically, investors described challenges  such as the variety of different metrics that companies used to report  on the same topics, unclear calculations, or changing methods for  calculating a metric. For example, five of 14 investors said that  companies’ disclosures on environmental or social issues use a  variety of metrics to describe the same topic. A few studies have  reported that the lack of consistent and comparable metric standards  have hindered companies’ ability to effectively report on ESG topics,  because they are unsure what information investors want. In  addition, some investors said that companies may change which  metrics they use to disclose on an ESG topic from one year to the  next, making disclosures hard to compare within the same company  over time.

Narrative disclosures. Most investors noted gaps in narrative  disclosures that limited their ability to understand companies’  strategies for considering ESG risks and opportunities. For example,  some investors noted that some narrative disclosures contained  generic language, were not specific to how the company addressed  ESG issues, or were not focused on material information. For  example, two private asset managers said that companies may  provide boilerplate narratives or insufficient context for their  quantitative disclosures, and representatives from one pension fund  said that the fund would like additional disclosures on cybersecurity  but has found that most disclosures on this topic are generic and not  very helpful.

Additionally, most institutional investors said that there is fragmentation in  the format or location of companies’ ESG disclosures, which can make  this information hard to compile and review. However, these investors  generally said that it is more important for companies to focus on  providing disclosures than on how or where the disclosures are  presented. These investors said that they are able to purchase access to  compiled data from third-party data providers to use in their analysis of  companies’ ESG disclosures.

Regarding how investors seek ESG disclosures, nearly all institutional  investors with whom we spoke said they engage with companies to  request additional ESG disclosures through meetings, telephone calls, or  letters. Some investors said that companies’ responsiveness, which can  include producing ESG presentations for investors and discussing ESG  information on earnings calls, varied by size because larger companies  have more resources to respond to investor engagement. Engagement  also can be complicated by conflicting investor demands, as well as the  proliferation of standards and surveys. According to representatives from  an industry group that we interviewed, the large number of demands for  specific ESG information from investors and third parties can pose a  challenge to companies as they prioritize how to respond. For example,  one company said it receives diverse requests for information that  indicate that those investors do not agree on what issues are most  important.

To a Limited Degree, Some Investors Seek ESG Disclosures through Shareholder Proposals

Some investors seek additional ESG disclosures by submitting  shareholder proposals, which are requests from shareholders that the  company take action on a specific issue or issues. These proposals are  generally presented for a shareholder vote at public companies’ annual  meetings. However, shareholder proposals can be withdrawn before  coming to a vote when the company reaches an agreement with the  shareholder who submitted the proposal prior to the annual meeting.

Our analysis of a generalizable sample of companies listed on the S&P  1500 found that in 2019, an estimated 10 percent of companies received  one or more shareholder proposals and an estimated 5 percent of  companies received one or more shareholder proposals related to  increasing ESG disclosures. For the ESG-related proposals in our  sample, on average about 28 percent of shareholders voted in favor of  these proposals and no proposals received more than 50 percent of the  vote. As shown in table 3, the companies in our sample received a total  of six proposals requesting additional ESG disclosures on a variety of  social and governance topics. Most of these proposals were submitted to  large companies. Investors that submitted proposals included one public  pension fund, one labor organization, three socially focused asset  managers, and one higher education endowment.

All of the private asset management firms and representatives from three  of seven pension funds we interviewed said they do not use shareholder  proposals as a means to influence companies’ ESG disclosures. One of  these pension funds said they have found filing shareholder proposals  unnecessary after engaging in dialogue with companies. However,  representatives from four of seven pension funds said they have filed  shareholder proposals to seek additional ESG disclosures. Two large  pension funds said they have found filing shareholder proposals an  important engagement method for getting companies’ attention on ESG  issues, while the other two funds noted that it was rare for them to file a  proposal.

Similarly, studies and reports we reviewed indicated that shareholder  proposals are concentrated among a relatively small number of  shareholders and that the number of proposals has been declining in the  last 5 years. For example, a law firm’s analysis of shareholder proposals  filed with companies listed on the S&P 1500 in 2019 reported that 10  investors submitted over half of all proposals. This report also found that  faith-based investors and socially focused asset managers, who seek to  advance social causes in their investments, submitted the majority of  environmental and social proposals in both 2018 and 2019. In addition,  this analysis showed that the total number of shareholder proposals,  including withdrawn proposals, submitted annually declined each year  from 2015 to 2019. As the total number of proposals has declined,  shareholder proposals related to environmental and social issues  constituted over 45 percent of proposals each year from 2015 to 2019.  While studies found that during this same time period shareholder support  increased for these environmental and social proposals that went to a  vote, shareholder support for most of them remained below 30 percent.

Selected Companies Generally Disclosed Many ESG Topics but Lack of Detail and Consistency May Reduce Usefulness to Investors Companies Considered Stakeholder Input and Regulatory Requirements in Disclosing on ESG Topics

Representatives from public companies with whom we spoke said they  use several methods and consider multiple factors when deciding which  ESG topics to report. Most companies (10 of 18) noted that legal and  regulatory requirements were their primary consideration when  determining which ESG factors to disclose. In addition, nearly all  companies (15 of 18) told us they conduct some form of stakeholder  engagement when determining what ESG information beyond regulatory  requirements to report. As part of the engagement process, companies  generally said they reach out to investors, representatives of communities  they operate in, and other interested stakeholders to solicit their opinions  about which ESG factors are important to them. Some companies  described their ESG stakeholder engagement process as part of their  broader company-wide outreach efforts, while others told us they hired  outside firms to conduct this engagement on their behalf.

In addition to stakeholder outreach, most companies (11 of 18) told us  they perform assessments to determine which ESG topics to include in  their regulatory filings or other reports. As part of these assessments,  companies review a wide array of potential risks and identify the ones that  would have the most impact on their business. In addition to  requirements, outreach and assessments, most companies (nine of 18)  told us they review ESG disclosure frameworks, such as GRI and SASB,  to inform their consideration of which ESG factors to disclose.

Similar to deciding which ESG topics to disclose, most companies (10 of  18) told us they also rely on legal and regulatory requirements when  determining where to disclose ESG information. Specifically, companies  said they identify those ESG factors that should be included in the 10-K or  proxy statement according to SEC requirements, and publish information  on these factors in their regulatory filings. In addition, some companies  (six of 18) told us that they view their voluntary sustainability report as  complementary to their regulatory filings. Specifically, four companies  said they view their sustainability reports as a place to publish relevant  ESG information that may not necessarily be material under the SEC  definition and is therefore not included in regulatory filings. Lastly, some  companies also told us that their voluntary sustainability reports provide  an opportunity to disclose information that is of interest to ESG-focused  investors or non-investor stakeholders. For example, some companies  (five of 18) told us they use these reports to reach a broader stakeholder  audience beyond investors, including employees and customers, when  writing their sustainability reports.

In addition to the regulatory and voluntary reporting that we reviewed,  representatives from all 18 companies said they communicate ESG  information in other ways. For example, most companies (13 of 18) said  they also publish issue-specific ESG reports, most commonly on climate  change. Most companies (12 of 18) also said they include ESG  information on their company websites, because information could be  updated more frequently and include more dynamic content, such as  videos. Finally, most companies (11 of 18) told us they have developed  ESG-focused presentations for investors, and some companies (four of  18) said they have begun including ESG information in their traditional  investor communications, such as quarterly earnings calls and  stockholder bulletins.

Most Companies Disclosed on Many ESG Topics, but Detail Varied on How ESG-Related Risks Are Managed

To assess the amount and characteristics of the ESG information  companies report, we reviewed regulatory filings and voluntary reports  issued by 32 large and mid-size public companies in eight industries.  For each company, we reviewed two types of regulatory filings (10-K and  the definitive proxy statement), annual reports (when distinct from the 10- K), and voluntary sustainability reports (where available). Of our selected  companies, 25 published voluntary sustainability reports and 21 published  annual reports separate from their 10-Ks. Using keyword search terms,  we searched these documents to identify disclosures related to eight  broad ESG factors and 33 more-specific disclosure topics under these  factors (see fig. 1). We selected ESG factors from among those that a  range of market observers frequently cited as important to investors or  potentially material and selected ESG topics by reviewing ESG disclosure  frameworks. For more information about this methodology, see appendix  I.

As shown in figure 2, we identified disclosures on six or more of the eight  ESG factors for 30 of the 32 companies in our sample and identified 19  companies that disclosed information on all eight factors. All selected  companies disclosed at least some information on factors related to board  accountability and resource management. In contrast, we identified the  fewest companies disclosing on human rights and occupational health  and safety factors.

With regard to the 33 more-specific ESG topic disclosures we examined,  23 of 32 companies disclosed on more than half of them. The topics  companies disclosed most frequently were related to governance of the  board of directors and addressing data security risks. Conversely, based  on disclosures we identified, we found that companies less frequently  reported information on topics related to the number of self-identified  human rights violations and the number of data security incidents. In  addition, we found that companies most frequently disclosed information  on narrative topics and less frequently disclosed information on  quantitative topics. There are several reasons why a company may not  have disclosed information on a specific ESG topic, including that the  topic is not relevant to its business operations or material.

Figure 3 compares the amount of disclosure on the 33 ESG topics within  and across the selected industries. We identified the most disclosure on  the group of topics related to board accountability, climate change, and  workforce diversity and the least amount on topics related to human  rights. SEC requires companies to report certain governance information  in their proxy statements in advance of shareholder meetings where  shareholders elect members of the company’s board of directors, which  may help explain why board accountability topics are the most reported  across industries in our sample. Additionally, differences in disclosure can  result, in part, from the relevance of an ESG topic to a particular industry.

For example, more companies in the airline and oil and gas industries  disclosed information on climate change, while more companies in the  internet media and banking industries disclosed information on data  security. We identified disclosures on fewer topics by companies in the  internet media industry than the other industries we assessed. None of  the four internet media companies in our sample issued a stand-alone  sustainability report. As discussed below, most companies tended to  include more extensive ESG disclosures in their sustainability reports  than in their regulatory filings.

Figure 4 illustrates how the amount of disclosures on the 33 ESG topics  compared across the four types of documents we reviewed. We found  that companies generally reported information on a wider variety of ESG  topics in their voluntary sustainability reports. Specifically, with the  exception of a few topics, when companies disclosed information on an  ESG topic, they most frequently did so in their sustainability reports.  Certain ESG topics were reported more frequently in regulatory filings.  For example, nearly all selected companies reported ESG information  related to their board of directors in their proxy statements. Additionally,  we found that companies disclosed on risks related to climate change,  data security, hiring employees, and resource management in their 10- Ks, which includes a risk factors section where companies are required to  discuss the most significant factors that make investment in the company  speculative or risky.

As discussed earlier, some investors with whom we spoke said they seek  additional narrative disclosures from companies whose disclosures  contained generic language or did not provide specific details about how  the company manages ESG-related risks or opportunities. Among the 33  ESG topics we reviewed, 16 were topics for which companies reported a  narrative rather than quantitative disclosure. We categorized these  narrative disclosures as either generic or company-specific (see fig. 5 for  examples). We defined company-specific disclosures as those that  discussed specific ways that ESG-related risks and opportunities could  affect the company’s operations or specific steps the company takes to  manage or respond to the ESG-related risks or opportunities. We defined  disclosures that did not include such specific details as generic  disclosures. As a result, such generic disclosures can be considered  applicable to the reporting company as well as to many of its peers.  According to two reports, companies may choose not to disclose more  detailed information for a particular ESG topic for several reasons,  including concerns that such disclosures would put the company at a  competitive disadvantage or expose it to legal liability.

For 11 of the 16 narrative topics, among companies for which we  identified disclosures on these topics, at least 75 percent disclosed  company-specific information (see fig. 6). For certain topics, such as  those related to companies’ actions to add new directors to the board and  promote diversity and inclusion, most companies disclosed information  and nearly all of those companies reported company-specific information.  In contrast, for other narrative topics, such as addressing data security  risks and describing climate-related risks and opportunities, we identified  company-specific information for less than two-thirds of disclosing  companies. In addition, for one narrative topic, describing obstacles that  might limit the company’s ability to hire the talent it needs, less than one- third of disclosing companies reported company-specific information. We  also found that disclosures we identified in companies’ 10-K filings were  less likely to be company-specific than those in the other three types of  documents we reviewed.

Though most of the narrative ESG disclosures we reviewed contained  company-specific details, these disclosures varied in the amount of detail  they provided about how a company manages ESG-related risks and  opportunities (see fig. 7). In particular, some companies’ disclosures  included details about specific steps the company was taking to manage  an ESG-related risk or opportunity and details about the results of such  efforts, while others did not. To the extent that some companies provided  more detailed disclosures, those companies’ disclosures could be of  greater usefulness to investors trying to understand the ESG risks facing  a company or the steps the company was taking to manage ESG risks.

Differences in How Companies Reported Some Quantitative ESG Topics Could Limit Comparisons across Companies

We identified inconsistencies in how companies disclosed on some of our  selected quantitative ESG topics, which may limit investors’ ability to  compare these disclosures across companies. Specifically, we found  instances where companies defined terms differently or calculated similar  information in different ways. We most frequently identified these  inconsistencies in quantitative topics associated with climate change,  personnel management, resource management, and workforce diversity.  For quantitative topics related to data security, human rights, and  occupational health and safety, five or fewer of the 32 companies in our  sample disclosed information on these topics, limiting comparisons  across companies.

As previously discussed, some investors told us that one of the reasons  they seek additional ESG disclosures is because it is difficult to compare  disclosures across companies. SEC also noted in a 2016 concept release  that sought comment on modernizing certain disclosure requirements in  Regulation S-K that consistent disclosure standards can increase the  efficiency with which investors process the information. Additionally,  three of the most commonly used ESG disclosure frameworks—GRI,  SASB, and TCFD—have a stated goal to help companies disclose  information in a way that allows investors to compare information among  companies.

Despite this focus on comparable reporting from investors, regulators,  and standard-setters, we identified instances where companies reported  certain quantitative metrics differently from one another for some ESG  topics. For example, in workforce diversity disclosures, some companies  reported their employee demographics using broad groupings, such as  “minority” or “ethnically diverse,” while others reported by specific racial or  ethnic groups. Similarly, some companies defined greenhouse gas  emissions differently. Most companies combined carbon dioxide and  other greenhouse gases when reporting emission data, but a few  reported carbon dioxide emissions alone.

We also identified instances of companies using different calculation  methods or units of measure when reporting information related to climate  change and resource management. For example, companies used  different base years when calculating their reduction in greenhouse gas  emissions, limiting their comparability. Some companies reported  reductions year-over-year, while many reported reductions over multiple  years with no consistency within or across industries. For example, airline  companies we reviewed reported emission reductions with base years  ranging from 1990 to 2017. Similarly, when disclosing total water  withdrawal, eight companies used metric units of measure while two  companies used imperial units of measure.

Companies that used the same ESG framework did not always disclose  on ESG topics in a consistent manner. Specifically, we identified the  types of inconsistencies discussed above in quantitative disclosures  among those companies using the GRI framework. For example, we  identified four different methods for reporting workforce diversity among  companies that reported using the GRI framework to develop their  disclosures. The GRI framework does not specify the method for  reporting diversity information, as it does for certain other topics.

SEC Primarily Uses a Principles-Based Approach for Overseeing ESG Information and Has Taken Some Steps to Assess ESG Disclosures

SEC Provides Flexibility to Companies to Determine Whether ESG-Related Information Is Material and Should Be Disclosed

SEC staff generally use a principles-based approach to overseeing public  companies’ disclosures of nonfinancial information, including information  on ESG topics. Under this approach, SEC staff rely primarily on  companies to determine what information is material and requires  disclosure in their SEC filings, such as the 10-K filing. SEC officials  noted that companies are ultimately responsible for the disclosures they  provide to investors, and they have liability for their disclosures under  federal and state securities laws. While federal securities laws generally  do not specifically address the disclosure of ESG information, Regulation  S-K’s disclosure requirements for nonfinancial information apply to  material ESG topics.

Corporation Finance officials noted that their reviews of public companies’  10-K filings are not a checklist review for compliance with securities  regulations. Instead, these reviews are meant to identify and address  potentially significant disclosure issues, such as nondisclosure of  information that the Corporation Finance review team believes is material  and therefore may influence an investor’s investment decision. Some  Corporation Finance review staff told us that in their reviews of public  companies’ 10-K filings they generally defer to companies’ determinations  about which ESG information is relevant to their business and should be  disclosed. Review staff also generally said they perform company- and  industry-specific research as part of their review, including company  websites, web searches for news articles, and earnings calls that may  identify material ESG information. In a January 2020 statement that  addressed climate change and environmental disclosures, the SEC  Chairman reiterated his view that SEC’s approach to disclosure on these  topics should continue to be rooted in materiality, including providing  investors with insight regarding the company’s assessments and plans for  addressing material risks to its business operations. The Chairman’s  statement also noted that this approach is consistent with the  Commission’s ongoing commitment to ensure that current disclosures on  these issues provide investors with a mix of information that facilitates  well-informed capital-allocation decisions.

Corporation Finance has provided its review staff with internal review  guidance that highlights relevant issues to consider, while emphasizing  the use of professional judgment when reviewing companies’ 10-K and  other filings. Staff use internal procedural guidance that provides steps for  conducting and documenting reviews of filings. While this guidance does  not include specific instructions for reviewing ESG disclosures, staff are  instructed to conduct background research on companies and industries  to determine if there is material information, such as potential risks, that  may be relevant to a company’s filing. As noted above, according to  review staff, this company-specific research could include ESG  information.

In addition, Corporation Finance has distributed internal review guidance  on a few ESG-related topics. This guidance illustrates how existing  disclosure requirements may apply to a given topic and offers information  for staff to consider when conducting background research and  performing filing reviews. In cases where the SEC review team identifies  a potential disclosure deficiency related to an ESG or other topic, they  may issue a comment letter to the company to request additional  information or additional disclosures when necessary. Most review staff  with whom we spoke said ESG-related information generally does not rise  to the level of comment unless they identify material information during  background research that may be relevant to the company’s operations.

In April 2019, Corporation Finance reallocated responsibilities for  reviewing nonfinancial information in 10-K filings, which also can include  ESG information, from attorneys to accountants. Corporation Finance  officials cited resource constraints, which reduced the number of  attorneys within the Division, as a factor in this decision. While review  teams vary by industry group and company, attorneys previously held  primary responsibility for reviewing nonfinancial disclosures, whereas  accountants primarily reviewed financial statements and related  disclosures in 10-K filings. SEC staff provided training to accountants on  how to conduct these reviews, which outlined Regulation S-K reporting  requirements for nonfinancial disclosures and highlighted areas for staff  to consider in various sections of the 10-K. Two of six accounting review  staff with whom we spoke noted that this training was thorough and said  they refer to training materials when conducting 10-K filing reviews.  Additionally, most accounting review staff told us they can consult legal  staff within their industry offices during reviews as necessary. According  to Corporation Finance officials, attorneys may still participate in reviews  of 10-K filings. Accounting staff also noted that they previously reviewed  nonfinancial information within the context of financial disclosures as part  of their financial reviews of 10-K filings.

SEC Took Steps to Assess Samples of Companies’ ESG Disclosures and Identify Emerging Issues

Corporation Finance has conducted assessments of samples of public  companies’ 10-K filings to examine the amount and type of disclosure on  selected ESG topics. Overall, Corporation Finance staff found that most  sampled companies included disclosure of selected ESG topics within 10- K filings and told us they did not issue additional guidance or interpretive  releases on these topics following these assessments.

Climate change disclosures: In 2012 and 2014, SEC staff issued  mandated reports to the Senate Committee on Appropriations that  assessed the compliance of climate change disclosures included in a  sample of 60 companies’ 10-K filings in selected industries. The  Committee had required these reviews following SEC’s issuance of its  interpretive release on climate change disclosures in 2010. SEC staff  found that most sampled companies included climate-related  information within their 10-K filings with varying levels of detail. Since  2014, Corporation Finance has conducted additional internal  assessments on these topics that have resulted in findings consistent  with previous reviews.

Additional ESG-related disclosures: In recent years, Corporation  Finance staff conducted additional assessments of disclosures related  to some ESG topics. These assessments involved staff reviewing the  disclosures of a sample of companies’ filings and evaluating  compliance with disclosure requirements. Corporation Finance found  that while the level of detail among disclosures varied, nearly all  companies included the relevant ESG topic within their filings.  Additionally, Corporation Finance staff outlined action items for the  Division, such as providing comments to companies as appropriate  and monitoring press reports for information that may be material for  companies to disclose.

In addition to internal assessments, SEC has taken steps to identify  significant emerging disclosure issues through the creation of the Office  of Risk and Strategy within Corporation Finance. According to  Corporation Finance officials, this office was created in February 2018  and was allocated additional resources in October 2019 to support its risk  surveillance function, in which it identifies emerging issues that may be  material for public companies by reviewing press articles, speeches, and  information from other sources such as industry experts. According to  Corporation Finance officials, once the office identifies an issue that may  present material disclosure risks, it may perform research and analysis  that can determine whether further internal or external guidance may be  necessary. Corporation Finance officials also noted these efforts may  result in additional guidance to review staff based on topics identified.

Policy Options to Enhance ESG Disclosures Range from Regulatory Actions to Private- Sector Approaches

Investors and market observers have proposed a range of policy options  to improve the quality and usefulness of ESG disclosures. These  options include legislative or regulatory action to require or encourage  certain ESG disclosure practices, as well as private-sector approaches,  such as industry-developed frameworks and stock-exchange listing  requirements.

These policy options can pose important trade-offs in relation to the  extent to which they impose specific new disclosure requirements or  encourage companies to voluntarily adopt certain ESG disclosure  practices. For example, while new ESG-related requirements may help  achieve greater comparability in ESG disclosures across companies and  reduce investor demands on public companies, voluntary approaches  may provide more flexibility to companies while limiting potential costs  associated with disclosing ESG information that may not be relevant for  their business.

Some institutional investors and market observers have proposed new  legislative or regulatory requirements to enhance public companies’ ESG  disclosures. These actions could take the form of new requirements for  specific ESG disclosures, a new SEC regulation that endorses the use of  an ESG disclosure framework, or new SEC interpretive releases on ESG  disclosure topics.

Some market observers have recommended that SEC issue new rules  requiring issue-specific ESG disclosures, such as disclosures related to  climate change. For example, one investor association said that it has  supported various petitions and requests for rulemaking at SEC on  environmental and human capital issues. SEC has taken steps to  consider these types of issue-specific ESG disclosures. For example, in  August 2019, SEC proposed including disclosure topics related to human  capital resources and management in the description of business section  of Regulation S-K. The rule has not been finalized, but in comment  letters to SEC on the proposed rule, some organizations requested more  line-item disclosures and metrics on this topic.

Gender Pay Gap Disclosure Requirements  in the United Kingdom (UK)  In 2017, the UK required issue-specific  disclosure rules for large companies to report  the difference in average pay for male and  female employees, according to a report by  the UK House of Commons’ Business,  Energy, and Industrial Strategy Committee.  An intended benefit of gender pay gap  disclosure is achieving greater equity in pay  by gender and improved economic  performance among UK companies,  according to this committee report. However,  the committee found in its 2018 review of this  reporting that some companies were unsure  how to account for alternative compensation,  such as child care vouchers and bonuses,  and that additional guidance was necessary  to help companies standardize their  disclosures. The committee’s report also  recommended that the government mandate  narrative disclosures where companies  explain their action plan for closing any  gender pay gap they may have.

As previously mentioned, most investors told us they seek comparable  information across companies, which line-item disclosure requirements  may facilitate. Increasing comparability across companies also may  reduce investor demands on companies, which have been increasing the  last 5 years, according to most companies with whom we spoke.  Additionally, requiring ESG disclosures in companies’ regulatory filings— rather than across multiple locations—could reduce information  disparities between large and small investors, because the information  would be located in a single place that was readily available to everyone.  For example, some third-party data providers, which compile ESG  information from various sources, may be prohibitively expensive to  individual investors and small advisors, according to a study  commissioned by the Department of Labor.

One impediment to improved ESG disclosures that some institutional  investors, companies, and market observers with whom we spoke cited  was the lack of consensus around what information companies should be  disclosing. Focusing on issue-specific ESG disclosure rules could allow  SEC to enhance disclosures on the most pressing issues that may have  more consensus, according to two academics we interviewed. As  previously discussed, our review found that several ESG factors were  commonly disclosed by companies across industries, including board  accountability, climate change, and workforce diversity.

On the other hand, regulatory requirements that necessitate new or  additional disclosures may increase compliance costs for companies.  None of the 18 companies with whom we spoke had quantified the costs  associated with their ESG reporting. However, companies generally said  that collecting and reporting ESG information required input from employees across the company. Three companies said ESG reporting  represented an increasing opportunity cost as employees spent more  time on reporting and away from business activities. Data not used in  regular business operations or data that required outside assurance were  the most costly disclosures, according to some companies.

In addition, some market observers have noted that issue-specific rules  can become outdated as issues evolve and that these types of  disclosures would reduce flexibility for companies. Line-item or issue- specific disclosures also may not be relevant for all companies, possibly  resulting in large volumes of immaterial information. According to one  academic, compelling companies to disclose on issues that may not be  relevant to them could distract companies from using resources on the  relevant disclosures.

Other market observers recommended that SEC issue a new rule  endorsing one or more comprehensive ESG reporting frameworks, such  as SASB or GRI, for companies’ reporting of material ESG issues. SEC  has required the use of frameworks in other rulemakings, such as rules  related to companies’ evaluation and disclosure of their internal controls.  For that rule, SEC endorsed the Committee of Sponsoring Organizations  of the Treadway Commission (COSO) Framework as satisfying regulatory  requirements. In its evaluation of several countries’ reporting policies,  the United Nations Environment Programme recommended regulators  use existing international standards and guidelines when developing  sustainability reporting policies.

Regulations that endorse one or more frameworks could maintain  flexibility for companies, because companies could choose which parts of  the framework are relevant to their businesses. In addition, frameworks  can be updated over time without necessitating new rulemaking in  contrast to issue-specific requirements that could become outdated.  Some institutional investors and companies with whom we spoke noted  the importance of flexibility if there were to be any new regulation for ESG  disclosures. Additionally, frameworks could encourage companies to  disclose on a wide range of ESG issues. Most investors told us they  focused on a broad array of ESG issues in their analyses.

European Union Directive Endorsement of  ESG Frameworks  A 2014 European Union directive that  endorsed companies’ use of existing  frameworks to report how they manage social  and environmental challenges has needed  several updates to improve comparability  across companies, according to a report by the  European Securities and Markets Authority  (ESMA). In 2017 and 2019, the European  Commission issued voluntary guidelines for the  directive that encouraged companies to use an  established disclosure framework to make  nonfinancial information easier to report and  compare, according to ESMA. However,  respondents to a 2019 survey by ESMA said  that among other obstacles, the lack of  specificity in the directive’s requirements and  the use of various frameworks contributed to a  lack of comparability among companies’  environmental, social, and governance (ESG)  disclosures. As a result, ESMA recommended  the European Commission amend the directive  to include both general principles for reporting  ESG information as well as a set of specific,  universal disclosures.

However, companies reporting based on different frameworks may limit  comparability across companies, and there was not consensus on which  framework companies should use. While some institutional investors told  us they supported SASB’s framework, investors also mentioned other  frameworks such as GRI, TCFD, and CDP. In a 2019 survey of 46 global  institutional investors, a consulting firm found that agreeing on ESG  standards that are relevant to companies’ performance was a challenge.  Additionally, the Chamber of Commerce noted that companies said in  roundtable discussions that the lack of universally accepted ESG  reporting standards was a major challenge to effective ESG reporting.  There have been initiatives recently to standardize ESG frameworks.  However, a project to improve comparability across frameworks found  that there were already high levels of agreement between climate change  disclosures standards and that standard-setting organizations needed to  more clearly communicate how their standards were interconnected.

Additionally, companies reporting under a framework may choose not to  disclose certain ESG information, which could result in less comparability.  As previously discussed, among the company disclosures we reviewed,  we identified instances of calculation inconsistency among quantitative  disclosures for companies that reported information according to GRI— the most prevalent reporting framework in our sample—because GRI  does not always include prescriptive disclosure recommendations and  sometimes allows for different calculation methods.

Some institutional investors and companies with which we spoke  indicated that additional SEC interpretative releases addressing how ESG topics fit within existing disclosure requirements could be helpful. These  releases can highlight the importance of ESG disclosures without  requiring a rule change, because they clarify without changing the  existing disclosure requirements. Some investors and SEC review staff  said that interpretive releases serve as a good reminder for companies to  consider ESG issues in their disclosures. Interpretive releases also  maintain flexibility for companies to disclose the information that is  material for each company. However, two market observers noted that  because these releases do not create new disclosure requirements, they  may not have much impact on ESG disclosures on their own.

About half of the companies told us previous SEC releases had been  helpful, but most investors said disclosures on these issues remain  inconsistent. Eight of 18 companies said SEC’s previous releases on  climate change and cybersecurity had helped create an even playing field  for companies or underscored the need for more transparency on these  issues, among other things. However, two investors and one international  organization noted that the release on climate change did not appear to  expand disclosure of climate change risk among U.S. companies. As  previously discussed, SEC staff reviewed samples of company’s  disclosures on climate change and found that most sampled companies  included climate-related information within their 10-K filings with varying  levels of detail. As a result, SEC staff decided against recommending that  the Commission issue additional releases.

Some institutional investors, companies, and market observers have  cautioned against legislative and regulatory intervention in ESG  disclosures and have recommended private-sector approaches to  improve companies’ ESG disclosures. One advantage of private-sector  approaches is that because they are voluntary, they provide companies  with flexibility. Some investors and companies said flexibility was  important in ESG reporting because the relevance of ESG issues can  vary by company and change over time. Conversely, because ESG  disclosures remain voluntary under these approaches, companies may  choose not to use them in their reporting. Private-sector approaches  could include industry-developed frameworks and stock exchange listing  requirements.

Some market observers with whom we spoke recommended that  industries develop their own industry-specific ESG framework. For  example, Edison Electric Institute and the American Gas Association  partnered to develop standards to guide electric and natural gas  companies’ ESG reporting. According to the American Gas Association,  the framework was created to provide the financial sector with more  uniform and consistent ESG data and information. SASB’s framework  also provides industry-specific standards, covering 77 different industries.

Industry-specific standards focus on ESG issues that industry  representatives believe are relevant to that industry. Some investors,  companies, and market observers said that ESG issues vary by industry  and therefore industry-specific standards are preferred. As previously  discussed, we identified some differences in the amount of disclosures on  specific ESG topics between industries. Agreed-upon industry-specific  standards provide consensus across various stakeholders and provide  comparability of ESG disclosures across companies, according to some  market observers, which also may reduce investor demands on  companies.

One disadvantage of relying on industries to create standards is that  some industries may be diverse and unable to find consensus on  standards. For example, two companies told us that their unique business  model does not fit into one industry group. Company and trade  association interests also may conflict with those of investors and other  stakeholders. According to two academics with whom we spoke,  individual companies do not have an incentive to work towards  standardized ESG reporting standards and will not do so on their own.

In some countries, stock exchanges have used ESG disclosure listing  requirements to try to improve companies’ disclosures. The United States  has several stock exchanges that list publicly traded companies, and  none have extensive ESG disclosure listing requirements. NASDAQ  produces a voluntary ESG reporting guide for companies and the New  York Stock Exchange, as a subsidiary of the Intercontinental Exchange,  has declared its support for ESG disclosures of its listed companies, but  neither requires such ESG reporting to be listed on its exchange.

Johannesburg and Tokyo Stock Exchange  Listing Requirements  Stock exchanges in Japan and South Africa  are examples where listing requirements have  been implemented to improve public  companies’ environmental, social, and  governance (ESG) reporting in those  countries. According to officials from Japan’s  Financial Services Agency, listing  requirements on the Tokyo Stock Exchange  have helped change how Japanese  companies disclose ESG-related information  and engage in proactive risk management.  Similarly, officials from the Johannesburg  Stock Exchange said that its listing  requirements have had a positive impact on  companies’ integrated reporting, which  includes ESG information. However, these  officials stated that other factors also have  contributed to the increase in integrated  reporting in South Africa. These include an  understanding by local companies of how  ESG factors affect their day-to-day operations  and increased investor interest in ESG  disclosures. According to research comparing  integrated reporting in 10 countries, a number  of factors contributed to South African  companies high-quality integrated reports,  including a framework for integrated reporting  developed by a local nonprofit organization to  assist companies in meeting the listing  requirements. according to two industry studies. One third-party data provider noted  that listing requirements provide an incentive—listing on the exchange— for companies to report on ESG issues. However, competition between  U.S. stock exchanges could give companies alternative listing  opportunities if one stock exchange enacted ESG disclosure listing  requirements. According to officials from the Johannesburg Stock  Exchange, as commercial entities, stock exchanges may choose to avoid  imposing mandatory listing requirements on companies because they  would risk losing listings that generate revenue to other exchanges or  discouraging companies from listing publicly.

Finally, some institutional investors, companies, and market observers  noted that it was too early to prescribe standards for ESG disclosures,  because there is not consensus among companies, investors, and market  observers on which ESG issues should be disclosed. The marketplace  should be given time to resolve these issues, according to these market  participants and observers. Government officials in the United Kingdom  and Japan and industry association representatives from South Africa  noted that increased investor interest prompted more meaningful ESG  disclosures from companies in their countries. However, they said that  nonfinancial reporting requirements can be a catalyst for changing  attitudes towards ESG disclosures.

We provided a draft of this report to SEC for review and comment. SEC  provided written comments that are reprinted in appendix II. SEC also  provided technical comments, which we incorporated as appropriate.

In its written comments, SEC generally concurred with our findings and  stated that our report will contribute to the ongoing discussion around  ESG disclosures among public companies, investors, and policy makers.  SEC also highlighted some of its related activities, such as issuing  interpretive releases on climate change and cybersecurity and soliciting  public comments on disclosure requirements. In addition, SEC reiterated  its commitment to materiality as the foundational principle for public  company disclosure requirements.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 4 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Chairman of the Securities  and Exchange Commission, and other interested parties. In addition, the  report will be available at no charge on the GAO website at  https://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or clementsm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) why and how investors have sought additional  environmental, social, and governance (ESG) disclosures; (2) how public  companies’ disclosures of selected ESG factors have compared within  and across selected industries; (3) steps the Securities and Exchange  Commission (SEC) staff have taken to assess the effectiveness of the  agency’s efforts to review the disclosure of material ESG factors; and (4)  the advantages and disadvantages of policy options that investors and  market observers have proposed to improve ESG disclosures.

Why and How Investors Have Sought Additional ESG Disclosures

To obtain information about why and how investors have sought  additional ESG disclosures, we reviewed relevant reports and studies by  academics, investment firms, and others published in the last 5 years. We  identified these reports and studies through interviewing investors and  market observers, reviewing sources cited in documents we obtained,  and conducting internet searches. These reports and studies provided  investor perspectives on issues related to ESG disclosures, including how  investors use ESG disclosures, the types of ESG disclosures investors  seek from companies, and investors’ use of shareholder proposals to  request ESG information.

In addition, we selected a nongeneralizable sample of 14 institutional  investors and conducted semi-structured interviews with them to obtain  information and perspectives on how and to what extent they incorporate  ESG information into their investment decisions, why they do or do not  incorporate ESG information, and why and how they engage with  companies around these disclosures. Institutional investors include public  and private entities that pool funds on behalf of others and invest the  funds in securities and other investment assets. For our sample, we  selected private-sector asset management firms and public pension funds  of varying size:  four large private asset management firms (each with more than $1  trillion in worldwide assets under management as of December 31,  2018);  three mid-sized private asset management firms (each with from $500  billion to $1 trillion in worldwide assets under management as of  December 31, 2018);  three large public pension funds (each with more than $100 billion in  total assets as of September 30, 2018); and  four mid-sized public pension funds (each with from $40 billion to $100 billion in total assets as of September 30, 2018).

To get a mix of regional perspectives, we incorporated geographic  location into our selection when possible. For example, we selected at  least one of the seven public pension funds from each of four U.S. census  regions (Northeast, South, Midwest, and West). The information collected  from this sample of institutional investors cannot be generalized to the  larger population of all institutional investors.

To obtain information about the extent to which investors have used  shareholder proposals to promote improved ESG disclosures, we  analyzed proposals submitted to a stratified random sample of 100  companies listed as of October 4, 2019, on the S&P Composite 1500,  which combines three indices—the S&P 500, the S&P MidCap 400, and  the S&P SmallCap 600 (see table 4). For our sample, we refer to  companies appearing in the S&P 500 as large, companies in the S&P  MidCap 400 as mid-sized, and companies in the S&P SmallCap 600 as  small. With this probability sample, each company on the S&P Composite  1500 had a nonzero probability of being included, and that probability  could be computed for any company. We stratified the population into  three groups on the basis of company size, and each sample element  was subsequently weighted in the analysis to account statistically for all  the members of the population, including those that were not selected. All  sample estimates in this report are presented along with their 95 percent  confidence intervals.

For each company in our sample, we obtained and reviewed its definitive  proxy statement for the annual meeting that took place in calendar year  2019 to identify shareholder proposals. Using a data collection  instrument, we analyzed each shareholder proposal submitted to a  company in our sample to determine if it was related to ESG disclosures,  what type of ESG disclosure it was requesting (environmental, social, or  governance), and what type of investor (such as individual, labor union, or  pension fund) requested the proposal. For any company in our sample  that disclosed one or more shareholder proposals in its definitive proxy  statement, we obtained and reviewed the company’s 8-K that included  the number of votes each proposal received at the company’s annual  meeting. We then calculated the percentage of votes in favor of the  proposal, using the number of votes shareholders cast in favor of the  proposal divided by the sum of votes cast in favor, against, and to  abstain. We downloaded these SEC filings from its online Electronic Data  Gathering, Analysis, and Retrieval (EDGAR) system.

How Selected Public Companies’ ESG Disclosures Compared within and across Industries

To compare public companies’ ESG disclosures within and across  industries, we identified and analyzed disclosures related to eight ESG  factors by 32 large and mid-sized public companies across eight  industries. First, we judgmentally selected eight ESG factors by reviewing  ESG factors frequently cited by a range of market observers (such as  ESG standard-setting organizations, academics, nonprofits, and  international organizations) as being important to investors or possibly  material for companies in several industries and through discussions with  market observers, including two ESG standard-setting organizations and  one investor association. We selected eight factors that were among the  most frequently cited, including at least two from each of the three  categories of ESG (environmental, social, and governance). The eight  ESG factors we selected were (1) climate change, (2) resource  management (water and energy), (3) human rights, (4) occupational  health and safety, (5) personnel management, (6) workforce diversity, (7)  board accountability, and (8) data security.

We then judgmentally selected 33 specific topics to represent company  disclosures on the eight ESG factors. Among these 33 specific topics, we  selected 16 narrative disclosure topics that companies can address by  providing a narrative discussion of ESG-related risks and opportunities  and their management of them and 17 quantitative disclosure topics that  companies can address by providing numbers and percentages. We  selected these topics by reviewing four ESG disclosure frameworks and  identifying commonly occurring disclosure topics associated with the  selected ESG factors. For a list of the ESG factors and topics we  selected, see figure 1 in the body of the report.

We then selected a nongeneralizable sample of 32 large and mid-sized  public companies to review their disclosures on the eight ESG factors and  33 ESG topics. First, we judgmentally selected eight industries from  which to select public companies. We identified industries that were likely  to disclose information on the selected ESG factors; had multiple  companies included in the S&P 500; and, when taken together,  represented a diverse range of industry sectors. The eight industries we  selected were (1) airlines, (2) beverages, (3) biotechnology and  pharmaceuticals, (4) commercial banks, (5) consumer retail, (6) electric  utilities, (7) internet media and services, and (8) oil and gas production.  We used industry classifications from the Standard Industrial  Classification system, which SEC’s Division of Corporation Finance uses  as a basis for assigning review responsibilities for industry groups.

We then selected four public companies within each of these eight  industries for a total of 32 companies. We selected four companies per  industry that were among the eight largest in terms of market  capitalization and that, when considered collectively within industries,  provided representation across different U.S. regions. We limited our  selection to U.S. public companies that were traded on either of the two  largest American stock exchanges. The information collected from this  sample of public companies cannot be generalized to the larger  population of all public companies.

We reviewed recent regulatory filings for these companies and voluntary  reports, such as corporate social responsibility reports, to identify relevant  disclosures on the selected ESG topics. We reviewed companies’ 2018  10-Ks, 2019 definitive proxy statements (which typically covered the same reporting period as the 2018 10-K), and 2018 annual reports (when different from the 10-K). We also reviewed companies’ most recent sustainability reports available on their websites, accessed from July through December 2019. We defined a sustainability report as a voluntary, stand-alone document that provided information on sustainability and other issues related to environmental, social, and governance factors. Companies can use other means to report ESG information, such as their websites or issue-specific company reports. We did not include single-issue documents or information included on  websites that was not also part of the sustainability report. There are  several reasons why a company may not disclose information on a  specific ESG topic; for example, the topic may not be relevant to its  business operations or the company may not consider it to have a  significant enough impact on its financial performance to warrant  disclosure.

To identify relevant disclosures, we searched each document for a list of  keywords related to each of the eight ESG factors to help identify  passages likely to contain ESG disclosures on the 33 specific ESG topics.  We selected these keywords by reviewing the 33 topics we selected and  identifying unique terms associated with them. We categorized each  narrative disclosure as being generic or company-specific. We  categorized a narrative disclosure as company-specific if it included  details about how ESG-related risks and opportunities affect the  company’s specific operations or how the company manages these risks  or opportunities. Otherwise, we characterized the narrative disclosure as  generic. Generic narrative disclosures are disclosures that could apply to  the reporting company as well as to many of its peers. We considered  each disclosure as a whole and, if it provided some company-specific  information, we categorized the disclosure as company-specific.

In addition, we conducted semi-structured interviews with representatives  of 18 of the 32 selected companies to obtain their perspectives on how  they determine what ESG information to disclose, where to disclose it,  and the benefits and challenges of ESG reporting. We requested  interviews with all 32 of the selected companies, but eight companies  declined and six companies did not respond to our request. For those that  did not respond, we made at least three requests by email. We  interviewed at least one company from each of the selected industries.  Furthermore, through the semi-structured interviews with investors  described above, we obtained investors’ perspectives on characteristics  of ESG disclosures that may limit their usefulness to investors.

SEC Staff Efforts Related to the Disclosure of Material ESG Factors

To understand SEC’s current regulatory framework for overseeing public  companies’ disclosures, we reviewed relevant laws and regulations, such  as Regulation S-K and the Sarbanes-Oxley Act of 2002. To review  SEC’s efforts related to ESG disclosures, we reviewed relevant SEC  policies and procedures, such as internal guidance and SEC’s interpretive  releases to public companies on climate change and cybersecurity  disclosures. We also reviewed SEC’s 2012 and 2014 reports on climate  change disclosures to the U.S. Senate Committee on Appropriations.  We reviewed additional internal SEC assessments on selected ESG- related topics to obtain information on steps taken by SEC to review ESG  disclosures. To obtain information on how staff conduct reviews of annual  10-K filings and ESG information, we interviewed SEC officials from the Division of Corporation Finance and a nongeneralizable sample of 15 review staff from the same division (six attorneys, six accountants, and three office chiefs). For our sample, we judgmentally selected staff in industry groups in accordance with those selected for our sample of public companies and with varying levels of tenure at SEC. The information collected from this sample of SEC review staff cannot be generalized to the larger population of all SEC review staff.

Policy Options to Improve ESG Disclosures

To identify relevant policy proposals to improve ESG disclosures, we  reviewed reports and public statements from investors, ESG standard- setting organizations, and other groups that provided their perspectives  on the current state of ESG disclosures and potential policy proposals,  including advantages and disadvantages of these proposals. For  example, we reviewed letters submitted by various groups to SEC in  response to its 2016 request for public comment on possible changes to  regulation S-K, as well as press releases by large asset management  firms. We conducted searches of government and academic literature for  research on ESG disclosures from the previous 5 years. We searched the  internet and various databases, such as ProQuest Newsstand  Professional and Scopus. Using broad search terms, we identified articles  related to our research objectives that provided useful context and  discussion topics for interviews with market observers, investors, and  companies. We also identified relevant reports and studies through  investor and market observer interviews, by reviewing sources cited in  documents we obtained, and through internet searches.

In addition, we reviewed reports and studies on international ESG  disclosure requirements to identify and obtain information about relevant  policy approaches implemented in other countries. We interviewed  government officials in the United Kingdom and Japan and stock  exchange and industry association representatives from South Africa to  obtain their perspectives on the quality of ESG disclosures in their  countries and the advantages and disadvantages of their current ESG  disclosure laws and policies. We selected these countries for interviews  because each had implemented one or more of the ESG policies that had  been discussed as potential policy proposals by investors and market  observers in the United States. Finally, we interviewed a  nongeneralizable sample of 13 market observers selected to represent a  range of stakeholders, including ESG standard-setting organizations,  academics, and representatives of industry and investor groups, to obtain  their perspectives on issues and policy options related to ESG  disclosures. We selected these market observers through studies and  reports of companies ESG disclosures that identified leading observers  with subject matter expertise and through referrals obtained during  interviews for this study. We also used information obtained from our  interviews with investors and companies to inform our analysis for this  objective.

We conducted this performance audit from January 2019 to July 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Comments from the Securities and Exchange Commission

Michael Clements at (202) 512-8678 or clementsm@gao.gov.

In addition to the contact named above, John Fisher (Assistant Director),  Katherine Carter (Analyst in Charge), Emily Bond, Rachel DeMarcus,  David Dornisch, Justin Fisher, Christopher Lee, Elizabeth Leibinger,  Efrain Magallan, Adam Martyn, Patricia Powell, Jena Sinkfield, Tyler  Spunaugle, Winnie Tsen, and Jack Wang made key contributions to this  report.

Nonfinancial information about how a company does business (e.g., a bank’s cybersecurity program) could be an indicator of its long-term financial performance.

Investors have been asking companies to disclose more on these environmental, social, and governance topics (known as “ESG”).

We reviewed disclosures from 32 companies. Most included some of this information, but it wasn’t always clear or useful. For example, it was hard to compare climate or resource-related information when companies used different calculation methods or reported results in different units of measurement.

We discussed several options to improve these disclosures.