Javier El-Hage


ESG Disclosures, ESG Ratings, SEC, Market Efficiency, U.S. Capital Markets


This Note provides an overview of the debate around the current state of ESG disclosure practices, and the perceived need for the SEC to establish a system of mandatory ESG disclosures. Part I explores the inherent difficulty of defining ESG, the problematic nature of quantifying and measuring ESG factors, and the tools currently being used by market-leading ratings firms and investment vehicles. In particular, this part addresses the inconsistencies of ESG self-reporting, the influence of this practice on the ensuing ratings, and the potential for investors to be misled as a result.

Part II of the Note explores the possible consequences of a system of mandatory ESG disclosure, weighing the main arguments in favor and against the establishment of a regulation that mandates ESG disclosures. Drawing from a 2018 SEC submission by the law professors Cynthia A. Williams and Jill E. Fisch, Part II explores the arguments around general market efficiency, U.S. capital markets competitiveness, and the ultimate goal of giving investors access to better, more consistent, and fairly comparable information, while keeping the costs of increased reporting outweighed by the benefits of it.

Part III closes by describing current proposals in favor mandating ESG disclosures. In particular, the Note presents the proposal by Professor Fisch, under which the SEC may mandate a discussion on ESG, while allowing companies the flexibility to decide what factors to address and how to address them in view of materiality considerations for their specific industries.



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