The costs of mandated ESG disclosure

 

As an ESG Consulting in Dubai, the Securities and Exchange Commission seeks to tighten disclosure regulations for investment funds, emphasizing ESG. In supporters' opinion, extensive and mandatory ESG disclosure regulations will better inform investors about the ESG practices of public companies (such as their carbon usage), resulting in more investment capital flowing to ESG-intensive companies and less to those lagged in ESG initiatives. However, the societal costs of a broad government mandated ESG reporting scheme in Canada will likely outweigh the social advantages.

As an expert ESG Consultant, the company has a solid incentive to disclose its ESG activities to the investment community if investors are willing to pay more to own stocks and bonds of a company that engages in "best practice" ESG activities. This is because doing so would help the company reduce its financing costs, which are, from an investor's perspective, mirror images of the values of the company's equity and debt-financing instruments. As a result, businesses that voluntarily disclose their positive ESG-related actions to investors ought to experience cheaper financing costs and competitive advantage.

Being an ESG Strategy in Dubai, why would the government need to establish a mandatory ESG disclosure requirement if voluntary ESG disclosure will undoubtedly benefit companies? Some businesses may overstate or make false claims about their ESG practices in an environment where ESG disclosures are not required and hence less monitored by the government (sometimes known as greenwashing). But if investors discovered this greenwashing, these same corporations would sustain irreparable financial and reputational harm. Most certainly, only a few businesses would take the risk.

In our opinion, as an ESG Consulting in Dubai, some businesses may overstate or make false claims about their ESG practices in an environment where ESG disclosures are not required and hence less monitored by the government (sometimes known as greenwashing). However, some contend that regulations requiring ESG disclosure would provide investors with more meaningful ESG data than a voluntary disclosure system if regulatory sanctions backed them against offenders. So why would the government need to establish a mandatory ESG disclosure requirement if voluntary ESG disclosure will undoubtedly benefit companies?

But if investors discovered this greenwashing, these same corporations would sustain irreparable financial and reputational harm. Most certainly, only a few businesses would take the risk. However, some contend that regulations requiring ESG disclosure would provide investors with more meaningful ESG data than a voluntary disclosure system if regulatory sanctions backed them against offenders. Yet regrettably, measurement and methodology issues beset the empirical studies on that issue. Empirical data on the benefits to investors of demanding more thorough and uniform ESG disclosures should be included in this discussion.

To help you as an ESG Consultant in Dubai, a recent study from the Fraser Institute that assesses the actual data on the financial gains from ESG-themed investment strategies finds no evidence to support the idea that businesses with high ESG ratings are rewarded with lower capital costs. This conclusion raises significant concerns about the potential social advantages of an ESG reporting regime imposed by the government, whether in Ottawa or elsewhere. It will undoubtedly result in substantial new business expenditures, particularly for small and medium-sized businesses.