SEC Commissioners Raise Concerns about Emerging Market Risk and ESG Disclosures

At an Investor Advisory Committee meeting, SEC Chair Jay Clayton and SEC Commissioner Hester M. Peirce raised issues (see here and here) concerning (i) emerging market investment risk, most notably in China, and (ii) environmental, social and governance ("ESG") disclosures.

Mr. Clayton and Ms. Peirce highlighted the following:

SEC Chair Jay Clayton. Mr. Clayton expressed concern about risks associated with investing in emerging markets, singling out China. He stated that U.S. retail investors' exposure to emerging market investments has "increased significantly" in the past decade due to (i) mutual funds that are managed both actively and passively and (ii) exchange-traded funds that invest in companies based on their respective indices.

He emphasized to the committee the importance of focusing on credit ratings' influence on the marketplace.

SEC Commissioner Hester M. Peirce. Ms. Peirce argued that a new disclosure framework for ESG information is not necessary when there is already a disclosure structure that is able to address a myriad of information types. She raised concerns with ESG data providers "bombarding" issuers with questionnaires in order to provide assessments that the Commissioner described as being of "questionable value."

Ms. Peirce noted that a number of foreign markets place an emphasis on ESG disclosures, and pointed out that the China Securities Regulatory Commission ("CSRC") is among them. She called that "interesting" given that the quality of financial disclosure by CSRC companies has been called into question. She generally characterized ESG disclosure as being "less transparent and less consistently applied" than traditional financial disclosures.