Weeks into the Biden administration, the Securities and Exchange Commission (SEC) is mulling a larger focus on the “Environmental, Social, and Governance” (ESG) actions of publicly-traded companies — amorphous categories that one industry official said could lead to “politicizing the role of the corporation” that “will inevitably alienate not only a large portion of a company’s customer base but a significant percentage of the company’s workforce.”
At various times, the SEC has weighed whether to require companies to disclose information to investors related to issues under the broad umbrella called “ESG.” Over the last year and especially in the last two months, the agency’s focus has sharpened.
“No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system and our economy,” Allison Lee, a Democrat appointed to the commission in 2019 and named acting chair by President Joe Biden, wrote in an op-ed this month.
The push will not end with climate change, Lee pledged. “In the near term,” the SEC’s efforts should include initiatives such as encouraging companies to report workforce and board diversity, she said.
Republican SEC Commissioner Hester Peirce warned that the environmental and social categories are both “quite unclear,” and may be “driven by people who want to know the information for other reasons.”
“A lot of the push for new disclosures is being driven by factors other than what normally drives our disclosure requirements, which is, what is material to a reasonable investor,” she told The Daily Wire.
“A lot of people who have concerns about a whole range of issues, social issues or climate issues or whatever, they’re looking at the SEC as the tool to work on those policies,” Pierce said. “It does run the risk of causing the SEC to engage in mission creep, and that’s really problematic, because our core mission is a really important one, and we don’t want to be pulled away from that.”
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Proponents of expanding ESG disclosure requirements argue that while there are outside entities that offer ESG data on companies, there is no consistent and reliable standard for comparing the data.
But Yafit Cohn, the chief sustainability officer and general counsel for insurer The Travelers Companies, expressed vehement opposition to expanding ESG disclosure during an SEC panel Friday, saying the term ESG “has been usurped by a broad variety of special interest groups to advance interests unrelated to shareholder value.”
“Those groups are increasingly calling upon corporations to solve complex societal issues that have historically been within the purview of a democratically elected government,” she added.
“Given the divided country we now live in, politicizing the role of the corporation will inevitably alienate not only a large portion of a company’s customer base but a significant percentage of the company’s workforce, as well,” Cohn said.
“Paradoxically, the politicization of both ESG and the role of the corporation … makes the corporation less sustainable over time,” she said.
Using the securities disclosure regime to achieve political goals not connected to increasing value for investors could create a disincentive for companies to list in U.S. markets and undermine the SEC’s public confidence, she said. “A very small group of like-minded individuals would be in a position to impact social change on a mass level” without any debate or checks and balances.
According to the Supreme Court’s definition of materiality, some investors expressing interest in a particular issue does not make it material and therefore necessary for disclosure.
“I think we all need to pause and think deeply about the possible impact on our democratic structure if the corporation is used to engineer social change,” Cohn said.
Cohn also argued that different industries — and even different companies within the same industry — would struggle to comply with a uniform approach for ESG disclosure. She also worried about lawsuits against companies resulting from the disclosures, which would burden shareholders.
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Some asset managers are getting a taste of expanded ESG disclosure thanks to sweeping new disclosure regulations on climate and social issues that went into effect in the European Union this month. U.S. asset managers that do business in the E.U. must comply with new rules requiring them to document and disclose potential effects of their investments on the climate and society, including board gender diversity and greenhouse-gas emissions.
In the U.S., one new SEC move came in the form of a new enforcement task force announced by Lee this month. The task force will work to identify ESG-related misconduct, with an initial focus on identifying “material” gaps or misstatements in companies’ disclosures of climate risks, meaning the information would be viewed as relevant by a reasonable investor.
In 2010, the SEC offered guidance to public companies on climate change disclosure. Now, the agency will scrutinize how well public companies are adhering to the guidance and complying with current climate disclosure requirements.
One thing the SEC is looking to crack down on is “greenwashing,” or companies claiming that their products are more climate-friendly or socially responsible than they actually are in order to appeal to investors who prioritize those issues.
In December, the ESG Subcommittee of the SEC Asset Management Advisory Committee issued a preliminary recommendation that the SEC require public companies to disclose ESG risks. On March 15, the SEC requested a public comment period on whether to expand the climate change disclosure requirements.
The push for stronger and expanded disclosure on ESG factors first began to ramp up last May, when the SEC Investor Advisory Committee recommended that the regulator expand reporting requirements.
“The message that we have heard consistently is that investors consider certain ESG information material to their investment and voting decisions,” the committee said in a report. “The use of ESG-related disclosures has gone from a fringe concept to a mainstream, global investment and geopolitical priority.”