Don’t forget the “G” in ESG: The SEC and Corporate Governance Disclosure

For years, many shareholders—both institutional and individual investors—have pressured the Securities and Exchange Commission (“SEC”) to require public companies to disclose more information about the environmental, social, and governance (“ESG”) risks facing the company. However, the SEC has generally refused calls to require public corporations to disclose, for example, how they are addressing climate change or workforce diversity challenges. With a new president in the White House and a new administration at the SEC, the SEC will soon propose new ESG disclosure rules, requiring more information about the “E” and the “S” in ESG. But the SEC has forgotten the “G” in ESG. This is a mistake.

In this Article, I highlight the overlooked relationship between governance, on the one hand, and environmental and social risks, on the other, and I show how this connection should inform the SEC’s forthcoming ESG-disclosure initiative. First, I demonstrate that the disclosure of governance information and the disclosure of environmental and social information are crucially linked. I argue that requiring public companies to disclose information about the environmental and social risks facing the company is not enough to protect investors. To ensure that shareholders are fully informed about ESG, the SEC must also require public companies to provide additional information about their corporate governance practices to establish that the board is able to manage those risks. Second, I argue that new rules requiring mandatory disclosure of additional governance information, particularly information relating to shareholder rights, will cause public companies to adopt better corporate governance practices. This will, in turn, strengthen the ability of shareholders to hold boards accountable if they fail to address the environmental and social risks that face public corporations today. Finally, I propose that the new mandatory information should be included in a new “Summary Corporate Governance Table.” This table should be made part of the proxy statement and should also be required to be posted as a standalone document on the company website for easy investor access. If the SEC does not recognize that the “G” is connected to the “E” and “S,” the SEC’s ESG-disclosure initiative will not be successful.