全球智库信息集成服务系统

America’s capital markets—made up of the stock, bond, and related financial markets—enable millions of investors to allocate capital every day to what they hope are the best economic uses in the coming years. When those markets are fair, efficient, and competitive, those investments play a central role in contributing to a vibrant economy and society. Growing companies produce the goods and services that the public needs, workers obtain employment, and investors earn returns on their investments. But capital markets are far from self-regulating; when they are insufficiently transparent or accountable, significant problems arise. Investors can be defrauded; good companies and their workers can fail to obtain the capital they need; and the public can suffer from worsening inequality, environmental damage, financial crises, and more.

America has some of the most robust capital markets in the world, but significant weaknesses in the functioning of the private markets expose American investors and the public to risks, harms, and lost opportunities. Indeed, a good deal of evidence suggests that today’s markets are too short-termist and fail to align the interests of corporate stakeholders to drive shared, long-term success.

An earlier Center of American Progress report—“Long-Termism or Lemons: The Role of Public Policy in Promoting Long-Term Investments”— explored how an excessive corporate focus on short-term results appears to be reducing business investments.¹ This trade-off likely means lower growth rates, reducing total output by 6 percent over a century.² The 2015 report offered a range of ideas to increase the long-term focus of the markets.

But “Long-Termism or Lemons” did not address the question of whether investors, markets, and key corporate stakeholders are sufficiently informed—and from that information, empowered—to do the basic work of the capital markets: drive smart capital decisions for the long term. This report asserts that the answer to that question is “no.” Shareholders and stakeholders of all types and sizes do not have access to the long-term-oriented information they need—in particular, environmental, social, and governance (ESG) information—in a consistent, comparable, and reliable manner.³

Public oversight of the nation’s stock markets is premised on the need for government to mandate corporate transparency. Corporations are understandably unwilling to voluntarily share information that might not be flattering but that investors and the public need to distinguish between good and bad investments. Moreover, information must be shared in a consistent, comparable, and reliable manner for it to be useful to investors and the public—and hence to enable efficient markets.

The Securities and Exchange Commission (SEC) was created during the Great Depression to address market failures and ensure this very transparency.⁴ Over the years, as investors, the economy, and the public interest have evolved, the SEC has had to update its requirements. When it has failed to do so, the consequences to investors of all types and to the public interest have been severe.⁵ Today, the SEC is behind the curve on mandating the disclosure of sufficient long-term-oriented information, especially ESG information. Its reliance to date on the private market to execute this public regulatory function has not worked.

The informational asymmetries created by these gaps in disclosure undermine the alignment of interests that the capital markets need to drive shared long-term success—what might be termed corporate long-termism. Investors lack the information needed to make smart front-end allocation of capital to long-term, socially beneficial uses. Management lacks the incentives needed to enable them to focus on the long term—whether that involves maximizing opportunities or minimizing risks. And the public, including policymakers, lacks the information needed to make intelligent long-term decisions about the economy and policy overall.

Unfortunately, the economic and societal consequences of this major roadblock to corporate long-termism are significant. Similarly, economies and societies are being roiled by popular dissatisfaction with globalization, rapid technological change, growing market concentration, and extraordinary levels of inequality.⁶ Even as the stock market is driven forward on the back of massive tax cuts and buybacks, collapsing middle- and working-class wealth poses significant long-term economic risks.⁷ Even more concretely, a study by The Economist found that by 2100, climate risks alone could imperil $4 trillion to $14 trillion in private sector assets and $43 trillion when public sector assets are included.⁸

Given the capital markets’ propensity to fads, booms, and busts, the market failure to provide sufficient ESG information to investors and other key market participants and corporate stakeholders may represent one of the most underappreciated systemic vulnerabilities of the U.S. financial system—and hence to U.S. economic growth.⁹ Furthermore, in an era where information and misinformation are often given equal footing in the public square, defending the quality of information in the capital markets is critical to protecting reliable economic growth.¹⁰

More long-term-oriented companies and capital markets cannot solve all the world’s problems, but they can make a meaningful difference in a lot of areas. Companies both affect and are affected by a wide range of ESG issues: employee and board diversity; worker benefits and training; environmental risks; financial stability; human rights; corporate political influence; tax evasion; monopoly power; and more. Indeed, investors and the public have already said so: The SEC’s 2016 Concept Release on Regulation S-K—the principal SEC regulation that governs corporate disclosure—garnered more than 26,500 comments from investors and the public. An analysis of these commenters showed that the comments overwhelmingly and persuasively favored ESG disclosures across a wide range of issues.¹¹

That’s in no small part because ESG matters are increasingly important to the long-term performance of companies themselves, especially their management of risk. And investors have been taking notice, in no small part because the perception of a trade-off between performance and social responsibility is increasingly being disproved by the numbers. Whether it’s a 2015 Harvard Business School study of 2,300 firms, a growing body of research on how resource-efficient companies outperform their peers, or its own analyses of how higher gender diversity yields better stock performance and lower volatility, Morgan Stanley’s Institute for Sustainable Investing confidently summed it up: “We believe sustainability creates business value.”¹²

Another institutional investment adviser put it like this:

“[W]e have been collecting studies from financial institutions and academic institutions that link ESG performance with financial performance since 2000, and to date we have collected 356 studies, all of which show that more sustainable companies or funds have financial performance that is comparable with, or better than, those of less sustainable peers. … In sum, there is ample evidence that environmental, social and governance factors are relevant to financial performance; if these factors were all immaterial, it would be difficult to explain how there could be so many studies showing correlations of financial and ESG performance over the past decade and a half.”¹³

Companies and management, too, have begun to take notice, but they face conflicts and collective action challenges that limit their ability to respond. For example, the number of companies issuing sustainability reports has increased, private standard-setters have offered new models for those disclosure, and investors are successfully engaging with companies on ESG matters.¹⁴ Yet, despite these interventions, some of which are costly, ESG information is still incomplete, inconsistent, often low-quality, and weakly unverified.¹⁵ That doesn’t even count the legislative, regulatory, and other political efforts that have sought to reduce transparency further.¹⁶ The cost-benefit calculus from regulatory inaction is increasingly high.¹⁷

Ultimately, much remains to be done to better align investors, managers, and other stakeholders for mutually beneficial long-term results. This report examines the role that improved corporate disclosure could play in boosting long-termism, focused especially on ESG information. As case study examples, the authors focus on inadequacies in the SEC’s approach to worker training and to climate-related disclosures, but, as noted, the same analysis could be applied easily to a wide range of ESG matters.

This report recommends that the SEC update its disclosure regime and related tools to better align interests of investors, management, and the public toward long-term economic success and the public interest. Specifically, the SEC should:

• Require high-quality, consistent ESG disclosure on both marketwide and sectoral bases.
• Look to expert, nongovernmental standards or standard-setters for ESG disclosure standards.
• Defend an investor-oriented, public-interest approach to the disclosure mandate.
• Update audit and data tagging standards to boost the availability and reliability of information.
• Empower SEC staff to be the voice of long-termism on behalf of investors and the public.
• Bring clear, bold enforcement actions and support similar actions by states and private investors.
• Boost board attention to corporate long-termism and sustainability.
• Boost shareholder voice in favor of ESG and long-termism.

In his inaugural speech, SEC Chairman Jay Clayton stated that the SEC’s analysis “starts and ends with the long-term interests of the Main Street investors … Mr. and Ms. 401(k).”¹⁸ The world has changed since 1982, when the SEC last meaningfully addressed the ESG information that those Main Street investors can reliably access.¹⁹ It’s time for the SEC to ensure that investors and the public get the information they need to better link corporate performance and risk management with long-term results for the American economy.

Publicly listed corporations are essential components of the U.S. economy. They employ millions of Americans, contribute to productivity growth, and provide essential goods and services upon which Americans depend.²⁰ However, in recent years, a sizable amount of evidence has emerged indicating that these corporations have become too focused on meeting short-term earnings, stock price targets, and market pressures for stock buybacks.²¹ Short-term pressures arise, for example, when executive compensation is too closely linked to short-term stock prices. Similarly, so-called activist investors—those who buy a large number of a company’s shares with the goal of creating some sort of corporate change—can pressure companies to engage in excessive levels of buybacks of their shares, or otherwise engage in business strategies that maximize short-term gain for investors but undermine the company’s long-term economic performance, stability, and social responsibility.²² The secular decline in business investment in the United States since 2001 appears, in part, to reflect these pressures.²³ Short-termist pressures also have played a role in the decline of American manufacturing.²⁴

The debate around how to respond to short-termism has mostly centered, to date, around two concerns: whether and how to limit stock buybacks,²⁵ and whether to insulate boards and management from investors’ influence, activist or otherwise.²⁶ In “Long-Termism or Lemons,” CAP analyzed some of these short-termism market pressures and recommended boosting corporate long-termism by deploying long-term executive compensation plans, limiting share buybacks, and enhancing long-term investors’ influence over the company’s board of directors.

What has not been as central to the debate as it should be is whether corporate long-termism can be promoted through disclosure. Building on the growing chorus of investors seeking this information for long-term performance and risk management purposes, this report argues that disclosure of the broad range of ESG information can play an important role in aligning the interests of all corporate stakeholders toward long-term, commonly shared interests.

ESG information and its growing impact on public markets

The effectiveness of capital markets in allocating investments, as well as in protecting investors from fraud and undo risks, depends first and foremost upon having a wide availability of information. Today, investors and the public lack critical ESG information that they need to make better long-term-oriented decisions. And as a result, corporate management does not receive sufficient ESG-related signals from the capital markets, which in turn discourages it from taking a long-term-oriented approach.

ESG issues cover a wide range of topics and facets of society that affect, and are affected by, the private sector. Whereas ordinary financial information seeks to present snapshots of the financial condition of the company on topics such as revenues, costs, cash flow, and more, ESG information seeks to present a snapshot of the company’s interaction with the physical environment, human beings, and institutional structures. The CFA Institute, which administers the chartered financial analyst (CFA) certification and supports professional standards for the investment industry, lays out a useful sampling of ESG topics.²⁷

Greater provision of ESG information would empower investors and the public to further and better incorporate long-term-oriented factors into their capital market decision-making, which, in turn, would affect how companies address those ESG and other long-termism matters.

That’s exactly what investors and the public are demanding. Investors of all types increasingly recognize that ESG information is an essential part of evaluating potential investments. A recent study found that 82 percent of mainstream, or non-ESG focused, investors considered ESG information when making investment decisions.²⁸ Moreover, at more than $8.72 trillion in total assets under management as of 2014, investing that takes into account ESG criteria is no longer a niche investment category.²⁹ The extraordinary increase in the number of signatories to the Principles for Responsible Investment (PRI) makes this clear. The PRI is a network of investors focused on promoting responsible investment through understanding and incorporating ESG factors into investment decision-making. Since its launch by the United Nations in 2006 with just 100 members, the PRI now has more than 1,800 signatories who manage more than $80 trillion in assets.³⁰

Pension plans, which particularly require long-term investment, are increasingly using ESG information in their investment process.³¹ Indeed, in response to that demand, the U.S. Department of Labor provided helpful flexibility by clarifying in 2015 that its regulations would not impede investment decisions to use ESG factors as part of the “primary analysis of the economic merits of competing investment choices.”³²

Thousands of asset managers with trillions of dollars in assets under management are not just factoring ESG information into their decisions because they want to do the right thing. It’s because ESG information is important for long-term investment success and in particular the management of risk—two core aspects of efficient capital allocation and investor protection. Several reviews of the academic literature, including one survey of 2,000 other academic studies, find a correlation between ESG criteria and corporate financial performance.³³ A range of academic evidence also points to lower costs of capital and other benefits to companies and investors that consider ESG factors in their decision-making.³⁴

Expanding ESG disclosure appears to have significant benefits and limited costs, consistent with the experience of disclosure more broadly. Evidence points to companies with strong disclosure practices having positive shareholder returns.³⁵ These companies also have better stock returns than those with poor disclosure practices.³⁶ Moreover, as discussed in detail below, with many companies already engaged in various types of information collection and partial disclosure, the additional costs of marketwide and consistent disclosure are limited.

Companies themselves are recognizing the low costs and high benefits of transparency. Despite limited formal regulatory requirements, more companies than ever are making sustainability disclosures. According to the Governance and Accountability Institute, the number of S&P 500 companies making “sustainability reports” increased from less than 20 percent in 2011 to more than 85 percent in 2017.³⁷

Companies are also providing discrete disclosures in response to investor pressure and questioning. For example, many are disclosing that they are using an internal price on carbon to guide decision-making.³⁸

The limits of market-driven progress

Demand for, and availability of, ESG information has blossomed in recent years. Yet today’s information marketplace is far from working well on its own. The ESG information being voluntarily made available today is not complete, specific, comparable, widely available, or well-verified.³⁹ Disclosures in SEC filings, which provide the highest standard for reliability, are often weak. Generic and boilerplate disclosures are ubiquitous.⁴⁰ Needless to say, all of this limits the information’s utility for investors, especially on a marketwide basis.

One study by the Sustainability Accounting Standards Board (SASB) focusing on climate-related disclosures alone found that as of October 2016, almost 30 percent of recent 10-K filings for the 10 largest companies by revenue in each industry do not identify any climate risks.⁴¹ Forty percent of companies have boilerplate disclosures.⁴² And even where disclosures have improved, comparisons of companies across a given industry are difficult, if not impossible, without the standardization of metrics and greater requirements for qualitative descriptions.

Ultimately, investors themselves have been overwhelmingly clear about the need for expanded disclosure on worker pay, training, benefits, and diversity; on environmental matters such as climate; on financial stability matters such as derivatives exposures; on human rights risks; on political spending; on tax strategies and risks; and more.⁴³ Each of these areas makes a persuasive case for how additional disclosure would boost the long-term alignment of interests among investors, companies, and the public.

The two case studies below illustrate the benefits of additional ESG disclosure for corporate long-termism, as well as the significant weaknesses in the disclosures available today.

Worker training

America’s working class have been under tremendous economic pressure in the past 15 years. The middle 60 percent of households have seen their incomes stagnate, and since 2000, workers without college degrees have seen their wages decline by 2 percent, while those with college degrees have seen a 3 percent increase.⁴⁴ Meanwhile, there are 4 million fewer Americans with jobs than there were in 2000, as demonstrated by the prime-age labor force participation rate.⁴⁵ On top of that, the financial crisis helped wipe out nearly 50 percent of the net wealth of the average middle-class household—comparing 2010 with 2001—and it has yet to fully recover.⁴⁶ In some regional economies and some demographics, the pain has been even more acute.⁴⁷

As worker training can be seen partially as a worker benefit, it should, perhaps, not be surprising that between 2001 and 2009, employer-provided training declined by more than 27 percent, the largest portion of which took place before the 2008 financial crisis and Great Recession.⁴⁸ That parallels the collapse in business investment that has also occurred since 2000, cited as key evidence of corporate short-termism.⁴⁹ And in fact, they are both disturbing: A range of studies shows how on-the-job training is important for boosting productivity for workers, firms, and the entire economy.⁵⁰

Short-term financial market pressures to reduce costs are not the only reason companies are under pressure to reduce workforce training investment.⁵¹ Factors such as declining employee tenure, declining compensation, and other structural factors matter a great deal, but capital markets pressures are real. Because human capital investments are not broken out from other general and administrative expenses, companies that make those investments look less efficient than others. With markets placing maximum pressure for—indeed, excessively valuing—buybacks and dividends today over investments that are likely profitable in the future, the impact of lumping workforce training into general and administrative expenses is likely magnified.⁵²

The good news is that there is a ready model for how disclosure can help reduce this conflict. Prior to the 1970s, spending on research and development (R&D) was specifically disclosed and appeared in various ways, ranging from general and administrative expenses to capitalization.⁵³ Since the Financial Accounting Standards Board mandated specific disclosure in 1974, R&D investment has become an important financial statement disclosure that investors look at to determine whether a company is innovative and investing for the future.⁵⁴