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ARA Offers Support for SEC Climate Disclosure Initiative

ESG Investing

The American Retirement Association has extended its support for the Securities and Exchange Commission’s review of company disclosures relating to climate change-related information. 

“We believe that financial disclosures play an important role in meeting the needs and demands of retirement plan investors,” the organization states in its June 11 letter to the SEC. “Like any investors, many retirement plan investors consider disclosures about ESG-related risks, uncertainties, impacts, and opportunities as material, if not central, to their decision-making about investments.”   

The letter comes in response to a request issued in March by the SEC’s then-Acting Chair Allison Herren Lee for feedback on how the Commission can best regulate and guide climate change disclosures. Citing increasing demand for climate change information and questions about whether current disclosures adequately inform investors, Lee directed the SEC’s Division of Corporation Finance in February to evaluate the climate-related disclosure rules in public company filings issued in 2010 to consider developments in the last decade. 

As part of its comments, the ARA urged the SEC to:

  • conclude that clear, consistent information about climate change which investors of all types can easily understand and compare is essential; and  
  • develop disclosure requirements which account for the widest array of investors, consistent with the SEC’s mission and in the best interest of the overall health of the financial markets.

The ARA explains how investing that considers financial return and climate change disclosures, as well as social and governance factors, is a growing part of retirement plan investing and that investor demand for material information on ESG investing is increasing.

ESG investing which may generate “socially desirable” results may be considered prudent for ERISA purposes so long as the choice to make or retain such investments can be justified solely based on material financial factors, the letter notes. This means that fiduciaries of ERISA plans must evaluate investment options based upon material financial factors, reviewing all relevant information, including prospectuses and marketing materials. 

Similarly, such disclosures may be material to investment decisions made by individual retirement plan investors who direct the investment of their own accounts, the letter explains. 

Clear, Comprehensible Disclosures 

Consequently, the ARA says that it strongly believes that climate-related disclosures should provide “clear and comprehensible” information relating to whether an investment presents a material risk or opportunity. What’s more, these disclosures must be understandable at both the plan level and the individual participant level.

“Disclosures should provide investors with consistent information that is decision-useful for investing and voting for ERISA fiduciaries, that is sufficient for carrying out their required duties, which necessarily includes comparing material financial factors. Moreover, comprehensible disclosures facilitate the benchmarking of investments’ performance, risk, and impact, an essential task of ERISA fiduciaries,” the letter states. 

Additionally, the letter calls for a simplified disclosure framework, arguing that one that produces only highly technical securities information without simple, comparable, and reliable information would be of limited utility to many retirement plan investors. “While we acknowledge that nuance may be lost with simplified disclosures, the consistency and convenience of simplified assessment regarding an issuer’s climate (and/or other ESG factors) performance would most effectively empower the greatest number of investors to incorporate appropriate criteria in their own investment decisions should they desire,” the ARA states. 

The ARA also suggests that responsibility for developing a disclosure framework for ESG investing should be vested in a government entity, as opposed to an industry-led entity, in order to best ensure the advancement of sound, universal standards.