ICI Backs Firmwide Diversity Disclosure Rule

BostonTtrustWaldenTimSmithThe Investment Company Institute has urged the Securities and Exchange Commission to issue rules requiring that all public companies and large private ones disclose data about their demographics.

Making companywide demographic data available to the public, fund managers and investors would help ICI member firms identify the effect of human capital management on the expected long-term value of companies, ICI President Eric Pan wrote in a comment letter submitted on Friday to the SEC.

This is the first time that the trade group has endorsed firmwide diversity disclosures for all companies, a trade group spokesperson says.

The Equal Employment Opportunity Commission mandates that firms report annual data about their employees’ race, ethnicity and gender. The data, which is typically self-reported, must be broken out on Form EEO-1 by job categories. The disclosures must be submitted by non-government employers with at least 100 staffers. Certain federal contractors must disclose such data if they have 50 or more workers.

The ICI backs making those disclosures public, Pan wrote.

“While some companies provide this information voluntarily today, the commission requiring all companies to provide the Form EEO-1 information would make it more widely available for fund managers to use in the investment process,” Pan wrote.

The SEC released guidance in 2015 that recommends standards for regulated entities’ diversity policies, but those recommendations are largely voluntary. Just 6.3% of Russell 1000 Index companies disclosed their EEOC reports as of January, a report from Just Capital, an ESG research firm and index provider, found. In addition, 68% of Russell 1000 Index companies had not released any diversity data at all, the report found.

The SEC has signaled its intent to pursue rulemaking that would standardize the disclosures about environmental, social and governance data, as reported. The call to increase public companies’ diversity disclosures has gained support from the U.S. Chamber of Commerce and Sifma, both of which backed a House bill mandating that corporate boards disclose their members’ self-identified races, ethnicities, gender and veteran status.

The bill passed through the House Financial Services committee unanimously. The ICI backed the initiative of the bill and stated its intent to work with lawmakers on it, a spokesperson said at the time.

Another diversity disclosure bill would mandate firmwide disclosure of diversity data as well as policies and procedures around hiring and promotion, among other company practices. That bill passed the Democratic-led committee along partisan lines. However, the Chamber of Commerce, Sifma and ICI did not support that initiative.

The ICI also last week urged the SEC to create mandatory climate-change-related disclosures. Any requirements should make it easier for fund managers to compare across companies, Pan wrote.

Any climate disclosure rule should also promote robust, meaningful information, the letter states. A rule should not encourage firms to rely on boilerplate language. And any framework should ensure that the costs do not outweigh the benefits, he noted.

Mandatory disclosures will help investors and fund managers more efficiently allocate capital, he added.

“While we believe certain disclosures should be mandatory, it’s essential that the SEC develops a regulatory framework that is flexible enough to allow disclosure practices to develop organically over time,” Pan stated in a press release about the letter. “Having a dynamic framework will enhance the quality and volume of disclosures about how sustainability-related risks could affect companies’ long-term value which drives investment decisions.”

Climate disclosures must be limited to material information, the letter argues, which can be quantitative and qualitative.

The disclosures should also have specific questions about different types of emissions. And depending on where the emissions come from, the required responses should vary.

For example, data on Scope One and Two emissions should be disclosed under the Task Force on Climate-Related Financial Disclosures protocols, Pan wrote in the letter. Such greenhouse gas emissions are directly produced and used by the company. The ICI backed such a framework last December, and the European Union implemented a climate-related financial disclosure regime in March based on TCFD.

However, requiring disclosures of greenhouse gas emissions beyond Scope One and Two should be studied and fleshed out more, Pan wrote. Most companies cannot access that information, known as Scope Three data, that would allow for consistent, comparable and verifiable data, he added.

Because there is no common methodology for calculating Scope Three emissions, the SEC should promote reporting practices that provide assumptions, models and methods for ascertaining such information before pushing any mandates.

However, firms should be welcome to voluntarily disclose such information, he wrote.

“If the commission determines to mandate Scope Three [greenhouse gas] emissions, we recommend it take a phased in approach to address companies’ concerns about accessibility and liability,” Pan added.

All required climate data should be reported regularly on 10-Ks, 8-Ks or other consistent, publicly available disclosures, Pan stated.

Privately held companies with more than $10 million in assets, as well as 2,000 or more investors with 500 of them not being accredited investors, should also be required to periodically disclose the same sustainability-related information as public companies, Pan wrote.

“The commission doing so will enable fund managers to better understand the entire competitive landscape and value chain and place both types of companies on a more level playing field,” he wrote.

...we find that banks with more gender diversity on their board perform better once the composition of these boards reaches a critical level of gender diversity, corresponding to a board female share of around 13-17 percent.

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