Why it is in shareholder interest to disclose sustainability actions

The Securities and Exchange Commission mustn't dilute these corporate disclosures as they affect investors in many ways

- RAGHURAM G. RAJAN

In a recent Financial Times commentary, US Securities and Exchange Commission (SEC) chairman Paul Atkins argued that “the SEC should only require companies to supply information under the objective standard of whether a reasonable investor would regard it as important to an investment decision. Rules written for shareholders who seek to effect social change or have motives unrelated to maximizing the financial return on their investment fail this test—and fail investors.”

At face value, Atkins’ statement seems unexceptional. But it leaves open a key question: What is material to a firm’s financial performance? Atkins suggests that disclosure should not be driven by “political fads or distorted objectives,” citing the European Union’s Corporate Sustainability Reporting Directive, which expands and standardizes corporate sustainability reporting to improve transparency and comparability of environmental, social and governance (ESG) information. Such disclosures, he argues, “may be socially significant but are not generally financially material.”