[Ed. note: In observance of the Fourth of July in the U.S., no blog will be published tomorrow. We will be back Friday. We wish everyone a safe and happy Fourth.]
Last week, SEC Commissioner Hester Peirce gave remarks about ESG at the Annual US-Central and Eastern European Connection Weekend. Peirce is definitely not a fan of ESG and her comments clearly show that. At the same time, she was right in a few of her criticisms which center on the ambiguity of ESG.
- “Asset managers, companies, and governments are embracing ESG without considering the long-term consequences to, respectively, their clients, shareholders, and citizens.” No doubt in recent years, many companies jumped on the ESG/sustainability bandwagon without giving careful consideration about what they were committing to. We’re now seeing backtracking and retreats from a range of DEI, emissions reductions, circular economy and other ESG initiatives.
- “ESG encompasses everything that sounds good in the moment: climate, biodiversity, clean water, oceans, employee well-being, labor rights, community engagement, the circular economy, the list goes on. No firm could identify—let alone evaluate—every issue that might fall under the elastic definition of ESG.” True – this is where materiality assessments come in. Many observers now criticize ESG materiality determinations as still too broad and a sharper pencil is needed to allow companies to focus. But it isn’t quite that easy: companies have to contend with double materiality and the understanding that materiality is far more than an element of disclosure – it guides the company’s actions.
- “Companies sometimes target ESG goals that are inconsistent with financial returns. They point to the interests of an expansive set of stakeholders to justify doing things, some of which may conflict with shareholder interests. ” Connecting ESG to customers’ key buying criteria and/or other business fundamentals should be the goal rather than attempting to bypass that and appeal directly to investors without financial value as a backstop.
Perhaps the meatiest comment, referring to the potential for ISSB global adoption:
“A single global disclosure framework would ease compliance costs for companies that otherwise would be subject to multiple regimes, but it also would aggravate the problems created by such a mandatory ESG framework. If common a global framework guides companies world-over to prioritize things other than corporate value maximization, creates a convergence in global decisions about capital flows, and imposes a universal layer of rigidity on corporate and investor decision-making, markets will lose the heterogeneity and adaptability that they need to fund innovative solutions to new and intractable problems. If every hitchhiker gets in the same jeep, we might all drive off the cliff together.”
Maybe, but decades ago I had similar concern about global uptake of ISO14001 (the original version of the environmental management standard) – not in relation to capital markets but in environmental compliance and innovation. For many reasons, my fears didn’t materialize; some of those reasons apply to Peirce’s comment. Mainly, each company makes their own materiality determinations for reporting and action, and innovation in how companies respond to the constraints simply won’t stop.
Our members can learn more about the SEC’s views of ESG here.
If you aren’t already subscribed to our complimentary ESG blog, sign up here for daily updates delivered right to you.
