business man checking one of three checkboxes (Photo: Shutterstock)

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Twelve of 14 institutional investors interviewed for a U.S.Government Accountability Office study said they seek out information on companies' ESGissues because they're trying to better understand risks that mayaffect the companies' long-term financial performance. This whilethe Trump Department of Labor is proposingincreased documentation requirements that in effect will discourageconsideration of ESG criteria and inclusion of ESG funds in employer-sponsored retirementplans.

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The GAO study found that public companies vary in theirdisclosure of environmental, social and governance issues, and thisoccurs not only across industries but within them. And someinstitutional investors are suggesting new legislative orregulatory requirements aimed at enhancing the ESG disclosuresmade.

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The proposed legislative or regulatory actions include possiblenew requirements for specific ESG disclosures, a new Securities andExchange Commission regulation that endorses use of a specific ESG"disclosure framework," and new SEC "interpretive releases" thatwould address various ESG disclosure topics, according to the GAOreport issued this month about the study.

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In general, the study found, investors look at ESG disclosuresin an effort to learn which ESG issues companies are monitoring andto assess how their management of certain risks.

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Still, some investors also use ESG information to promote socialgoals, the study found. It noted, for example, that five of 14investors interviewed by the GAO said they created ESG-focusedinvestment funds or portfolios with the aim of pushing socialresponsibility and environmental sustainability.

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The GAO report, which was sent to Sen. Mark Warner, D-VA, amember of the Senate Banking Committee, was undertaken because"investors are increasingly asking public companies to discloseinformation on ESG factors to help them understand risks to thecompany's financial performance or other issues, such as the impactof the company's business on communities."

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The study relied on interviews with seven private asset managersand representatives from seven public pension funds. It analyzed 32large and mid-sized public companies found across eight industriesrepresenting a range of U.S. economic sectors. And it looked at thecompanies' disclosures regarding 33 ESG topics chosen because theywere "frequently cited as important to investors by marketobservers."

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According to the GAO's report, the companies examined putforward the most disclosure on topics tied to board accountability,climate change and workforce diversity. Conversely, they providedthe least amount of disclosure on topics linked to humanrights.

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The report noted, though, that "the SEC requires companies toreport certain governance information in their proxy statements inadvance of shareholder meetings where shareholders elect members ofthe company's board of directors, which may help explain why boardaccountability topics are the most reported across industries inour sample."

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It was also noted that "differences in disclosure can result, inpart, from the relevance of an ESG topic to a particular industry"such as airline and oil and gas industry companies disclosing moreclimate change information.

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Regarding some of the proposed new legislative or regulatoryactions, the study found that some investors and companiesinterviewed "indicated … that new or additional SEC interpretativereleases addressing how ESG topics fit within existing disclosurerequirements could be helpful," said the report.

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Still, "some institutional investors, companies, and marketobservers have cautioned against legislative and regulatoryintervention in ESG disclosures and have recommended private-sectorapproaches to improve companies," the report said.

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"One advantage of private-sector approaches is that because theyare voluntary, they provide companies with flexibility," said thereport, before adding that "some investors and companies saidflexibility was important in ESG reporting because the relevance ofESG issues can vary by company and change over time."

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Jason Grant

Jason Grant is a staff writer covering legal stories and cases for the New York Law Journal, the National Law Journal and Law.com, and a former practicing attorney. He's written and reported previously for the New York Times, the Star-Ledger, the L.A. Times and other publications. Contact him at [email protected]. On Twitter, pls find him @JasonBarrGrant