Companies Could Face Pressure to Disclose More ESG Data

American corporations for years have been able to choose what they want to disclose in their annual sustainability reports, which are often glossy summaries of a company’s socially conscious actions. Under Securities and Exchange Commission regulations, public companies must only disclose ESG information if they deem it material to investors’ perception of the business.

Investors for years have pushed companies for more nonfinancial data, but some businesses haven’t been forthcoming.

“There’s a growing pressure for mandatory disclosures of public companies about climate change risk,” said Amy Borrus, executive director of the Council of Institutional Investors.

Mr. Biden’s transition team didn’t immediately respond to requests for comment.

The number of companies that report on their sustainability efforts has increased over the past decade amid the rise of socially conscious investing. Last year, 90% of companies in the S&P 500 index issued sustainability reports, up from about 20% in 2011, according to the Governance & Accountability Institute Inc., an ESG consulting firm.

At issue, however, is what these companies disclose. In the absence of enforceable standards or regulation, companies can cherry pick what metrics to make public and which to keep confidential. That puts them at odds with some investors who want a clear summary of the nonfinancial risks a company faces and the ability to benchmark a company’s ESG performance across an entire sector.

“Until we have some authoritative body, and maybe regulation mandating what to do, it’s just going to be the Wild, Wild West when it comes to standards and reporting for the time being,” said Louis Coppola, executive vice president at the Governance & Accountability Institute.

The SEC under Chairman Jay Clayton didn’t draft new rules on ESG disclosures, despite pressure from some of the commissioners to have companies do so. Mr. Clayton, who plans to step down this month, said earlier this year that combining analyses of environmental, social and governance in disclosures won’t be useful to investors. The regulator in September raised the bar for investors to submit proposals—most of which pertain to ESG issues—for a vote at companies’ annual meetings.

Exactly how the SEC could address the issue is unclear. Securities regulators could require companies to adopt an existing reporting framework, such as those from the nonprofit Sustainability Accounting Standards Board, investors and advisers said. Investors say they prefer the SASB benchmark because it is straightforward, and the board actively consulted investor groups in the development of the rules.

“It took a long, long time for financial accounting standards to reach their current level of maturity,” said Marshall Chase, director of sustainability at Micron Technology Inc., a Boise, Idaho-based memory-chip maker. “Sustainability standards aren’t there yet, and it would be great if they could get there over time, hopefully sooner rather than later.”

Drafting a proposal and soliciting industry feedback would take time, meaning that a rule is unlikely to be completed until at least 2022, according to Amy Lynch, a former SEC accountant who is now president at consulting firm FrontLine Compliance LLC.

“It will be an additional burden [on companies] and they will not go forth willingly, most likely, but it will happen,” Ms. Lynch said.

Expectations for an SEC rule making come amid a push for global reporting standards.

The foundation that oversees international accounting rule makers this fall proposed creating a new board to oversee sustainability reporting. That effort, led by the International Financial Reporting Standards Foundation, has received support from BlackRock Inc., the world’s largest asset manager.

“The sooner we can get to a globally recognized and adopted standard, the better we think in terms of reducing the reporting tax on companies,” said Michelle Edkins, BlackRock’s managing director for investor stewardship. Meanwhile, countries could move forward with their own rules, such as in the U.K., where regulators last month said they would require companies to report on the financial impact of climate change.

For some companies, the absence of ESG reporting rules can come at a cost. Companies are left to respond to a range of requests for sustainability reports and metrics from investors, ratings firms and community groups, which all have different interests. Additionally, choosing which ESG framework to use can be confusing, some executives said.

“The lack of standardization does make it difficult to adopt any one particular standard,” said Devinder Ahuja, CFO of Atlanta-based aluminum producer Novelis Inc. “The Biden administration is going to be much more active on this agenda.”

Write to Kristin Broughton at [email protected] and Mark Maurer at [email protected]