Is There Such a Thing as Too Much ESG Disclosure?

Demanding more information from individuals or organizations can have a paradoxical effect on the intended audience. The American Psychological Association calls the phenomenon “information overload,” which it defines as “the state that occurs when the amount or intensity of information exceeds the individual’s processing capacity, leading to anxiety, poor decision making and other undesirable consequences.”

As regulators around the world push businesses for more disclosures related to their performance on environmental, social and governance matters, they naturally run the risk of flooding the public marketplace with too much information. In fact, we’ve already reached that point, according to the head official for corporate governance in the UK.

At a conference earlier this month, Mark Babington, executive director of regulatory standards for the UK’s Financial Reporting Council, expressed his concerns with trends in ESG disclosure. With so many stakeholders bearing down on them for increased ESG transparency, companies have gone to extremes in disclosure, according to Babington. “One of the challenges for all companies – be they reporters in the EU, the UK or other jurisdictions – is that boards are going to have to get much more disciplined and discerning about what is material in the context of this company,” he remarked.

In what might seem like news to public interest groups in the United States, Babington hailed the boards of directors at U.S. corporations for their ability to distill ESG reporting down to the most essential information. According to Babington, best practices in the U.S. provide financial-statement users with material information, while ESG disclosure in the UK has turned into a “compliance exercise.”

Meanwhile, Babington noted that reporting more information has real costs, especially for small and medium-sized businesses. As regulatory authorities around the world continue to codify ESG disclosure rules, are they adequately accounting for the interests of those companies? Apparently, Babington believes that’s still to be determined, and smaller enterprises may need their own set of standards.

“How does this translate into a workable proposition for [smaller companies]?”, Babington asked. “We need to be able to have something that is operable, and that is ultimately going to meet the needs of the consumers of data. And I think we’ve got some way to go.”

Of course, the web of shadow regulators putting pressure on companies across the globe to think about more than just their bottom lines probably won’t find Babington’s concerns all that compelling. Given the stakes when it comes to matters such as climate change and social justice, getting too much information from corporations almost certainly beats not getting enough of it in their minds. And while it may be unfortunate if smaller companies find the additional compliance burdens overwhelming, activists and watchdogs would undoubtedly argue that we should consider those costs a fundamental part of doing business going forward.

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