Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure

In March 2022, for the first time in its history, the Securities and Exchange Commission (the “SEC”) proposed rules mandating disclosure related to climate change. The proposed rules are remarkable, first and foremost, because many in the business community continue to vehemently insist that environmental and climate change information is not material. Indeed, as one SEC Commissioner noted, corporations that responded to the SEC’s most recent requests for enhanced climate-related disclosure “generally have stated that the requested disclosures by SEC staff were largely immaterial and inappropriate for inclusion in SEC filings.” The proposed rules are also remarkable because previously the SEC has resisted climate-related disclosure, based primarily on the argument that such information strayed beyond strictly financial concerns and thus should not be the subject of mandated disclosure. This resistance is exemplified by the current lack of any significant SEC disclosure mandates for climate change. And of course, the proposed rules have sparked considerable controversy and pushback including allegations that the rules violate the First Amendment, would be too costly, and focus on “social” or “political” issues beyond the SEC’s mission. Thus, it is unclear whether, or to what extent, a climate-related mandate will emerge. Nonetheless, the proposed rules represent a significant and historical occurrence in the lifecycle of the SEC’s disclosure regime.

The proposed rules reflect the dramatic increase in investor and other stakeholder attention on environmental, social, and governance (“ESG”) matters. This increase has coalesced into demands for ESG disclosure. ESG disclosure advocates believe that ESG disclosure will provide shareholders and other stakeholders with the information they need to better monitor corporations’ ESG activities and hold corporations accountable for their ESG commitments. ESG disclosure demands have translated into a dramatic rise in voluntary ESG disclosure on corporate websites and various social media outlets. However, dissatisfaction with voluntary ESG disclosure has prompted a strenuous push for mandated ESG disclosure culminating in the SEC’s historic climate-related rule proposal.

While my article, Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure, (forthcoming 101 Tex. L. Rev. 2022), supports some form of mandatory ESG disclosure, the article argues that the potential for such disclosure should not cause ESG advocates to dismiss the continued importance of voluntary ESG disclosure. The article situates the current ESG disclosure discourse within the broader long-standing debate around public disclosure, and then advances a novel reconceptualization of that debate. In so doing, the article argues that the historical disclosure debate sets up a false disclosure choice between voluntary and mandatory disclosure. By treating disclosure as static and invariable, the historical debate fails to appropriately recognize the dynamic, evolving, and connected nature of the modern disclosure environment. In that environment, all publicly available disclosure is a part of a disclosure continuum; voluntary disclosure and mandatory disclosure are inextricably linked on that continuum. Moreover, in the modern disclosure environment, voluntary disclosure not only provides important foundational support for mandatory disclosure, but also supplements and extends mandatory disclosure, creating an important feedback loop between voluntary and mandatory disclosure.

In recognition of this modern disclosure environment, the article coins the phrase “dynamic disclosure” to shift disclosure discourse from a binary debate pitting voluntary disclosure against mandatory disclosure towards a recognition of the inextricable link between mandatory and voluntary disclosure.

Although novel, normative support for the article’s disclosure reconceptualization can be found in recent scholarship related to corporate “publicness,” which scholarship recognizes that the modern social media environment ensures that all publicly disclosed information—voluntary and mandated—is on a continual and interconnected feedback loop. Viewed from this lens, the phrase dynamic disclosure reflects a recognition that the modern publicness of corporate information has eroded the walls between voluntary and mandated disclosure, making it impossible not to consider voluntary disclosure as an integral aspect of mandated disclosure and the overall disclosure regime in which corporations operate. Support for the article’s reconceptualization also can be found in SEC guidance and enforcement behavior as well as the behavior of the corporate community. That guidance and behavior reveals that the SEC and corporate community have come to view voluntary and mandatory disclosure as interwoven, which clearly supports the article’s thesis around the connected nature of voluntary and mandatory disclosure and the modern disclosure environment

By highlighting the continued and complimentary value of voluntary disclosure, the article’s assertions around dynamic disclosure have significant repercussions. The article uses ESG disclosure to highlight those repercussions. The experience with ESG disclosure reveals the manner in which voluntary ESG disclosure provides benefits that cannot be fully replicated by mandatory ESG disclosure. That experience also reveals that voluntary ESG disclosure has served as an important springboard for mandatory ESG disclosure and likely will continue serving as a vital gap-filler for mandatory ESG disclosure, both complimenting and extending such disclosure. In the context of ESG disclosure, the article’s assertions around dynamic disclosure mean we must not only continue to rely on voluntary ESG disclosure, but also that we must take affirmative steps to ameliorate any shortcomings associated with voluntary ESG disclosure because such disclosure will remain a critical part of the overall ESG disclosure landscape. By emphasizing dynamic disclosure in the context of ESG disclosure, the article underscores the importance of ensuring that we maintain a robust voluntary disclosure regime even as we push for mandatory disclosure.