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Proposals to Limit ESG Reporting Requirements

Proposals to limit environmental, social, and governance (ESG) reporting requirements threaten to undermine corporate transparency and accountability.?

Some lawmakers argue that mandatory ESG disclosures are an unnecessary burden on companies. However, restricting ESG reporting could negatively impact investors and the public.

Specific legislative proposals aim to give companies more discretion over which ESG issues they report by only requiring disclosure of matters deemed "material" by the company.?

This could allow companies only to report significant ESG risks if it is in their interest. Investors and the public may need more critical information to make informed decisions.

Other proposals exclude ESG-related shareholder resolutions from companies' proxy materials, limiting shareholders' ability to demand action on important issues.?

Shareholder proposals have spurred companies to address climate change, political spending transparency, and board diversity. Excluding these resolutions cuts off this avenue for investor oversight and feedback.

Some lawmakers also want to restrict regulators' ability to consider climate-related financial risks. However, climate change poses severe threats to companies, investors, and the economy as a whole. Limiting regulators' capacity to address climate risk could endanger the financial system.

Anti-ESG legislation may aim to reduce purported "burdens" on companies, but in reality, it threatens to curb corporate accountability, harm investors, and ignore the financial implications of climate change. Robust ESG reporting and shareholder engagement are vital for responsible business practices and a sustainable economy.

Allowing Companies to Choose What They Deem "Material"

Allowing companies to determine what they deem "material" for reporting purposes poses dangers. Proposals advocating this approach argue that companies know their business and stakeholders best, so they should decide which environmental, social, and governance (ESG) factors are most relevant to report on. However, this argument needs to be revised.

First, companies may avoid reporting on important issues that could reflect poorly on them or their practices. For example, a company with a poor safety record may only report safety metrics if required. Stakeholders would remain unaware of these material risks.

Second, this approach needs to improve the comparability of companies. Investors and other stakeholders benefit from standardized ESG reporting that covers a consistent set of topics across companies. Allowing each company to pick and choose which topics they report on significantly reduces comparability.

Finally, materiality is complex with many interdependencies. What a company deems immaterial could significantly impact other areas they report on. For example, a company may not report on how climate change could affect its supply chain, even though supplier disruptions would be highly material. Regulators are better equipped to determine materiality holistically.

?While companies have valuable perspectives on their business and stakeholders, they also have incentives to avoid reporting on certain issues. Standardized, regulated ESG reporting helps address these shortcomings, providing stakeholders with a complete picture of risks and impacts. Proposals aimed at reducing regulated ESG disclosures should be avoided in favor of a collaborative approach to determining materiality.

Legislation restricting ESG reporting and investing threatens progress on critical environmental and social issues. Requiring companies to report only on self-determined material issues allows them to ignore risks they would instead not address. Excluding ESG shareholder proposals from proxy materials silences investors concerned about sustainability and ethics. Limiting regulator collaboration on climate risk leaves the financial system vulnerable to crises that could have been avoided. At a time when unprecedented global challenges demand cooperation and transparency, these laws move in the opposite direction. Responsible companies understand that ESG factors impact long-term value creation and resilience. Anti-ESG legislation may score political points today, but it jeopardizes the future. The dangers of shortsighted laws like these far outweigh any perceived benefits to corporate freedom or deregulation. Society will pay the price if they are allowed to pass.