The SEC’s efforts to impose sustainable investment metrics will likely be folly, Commissioner Hester Peirce says in a fresh volley from her rear-guard action against what she considers regulatory hubris.
“The natural desire for ESG certainty, however, runs into the many real-life uncertainties and complications that characterize the overflowing ESG bucket,” Peirce said in a July 20 speech to the Brookings Institute. “Any ESG rulemaking will have to confront these difficult realities.”
In Peirce’s brief, ESG has become a pop buzzword more than a concrete action plan. She says she has no objection in principle to reducing carbon emissions, say. Her worry is that her colleagues are reaching for something that isn’t there. Environmental investing isn’t linear, it’s complex and sometimes even contradictory, she claims..
“Consider, for example, a company’s decision to switch from fossil fuel production to renewables,” she says. “The renewables do not produce carbon dioxide, but windmills might kill bats, birds, and insects, and solar panels are very difficult to recycle. Building a fossil-fuel-powered electric grid in a country without one will result in carbon dioxide emissions, but will also enable the people in that country to live more prosperous, healthier lives and may be cheaper (or impose fewer harms on the local environment) than renewables.”
Peirce and her fellow Republican commissioner Elad Roisman face some challenges. Proponents of new rules for ESG investment are well organized, well-funded and abundant. The market is with them: The Global Sustainable Investment Alliance, a nonprofit advocacy group, claims the market for sustainable, ethical investments grew to $35.3 trillion last year.
Advisory titans certainly see a competitive advantage of new ESG disclosure rules. BlackRock and T Rowe Price, for instance, have each given full-throated endorsements of the SEC’s efforts. In fact, they each said the SEC ought to go further than the Commission itself is considering, and make new rules apply to private fund advisers, too.
For some advocates of new rules, the climate crisis can’t wait. Financial regulations are the fastest way to pull back from the environmental brink. “For climate, there is no vaccine,” lobbyist Steven Rothstein tells affiliate title Buyouts. “If we don’t make significant changes in our economy, [it’s] just going to get worse and worse.”
This kind of talk puts free market champions such as Peirce on their guard. Some of Peirce’s co-thinkers have argued that ESG is a marketing gimmick cooked up by fund advisers to keep investors from asking about the high fees they’re charging. The radical roots of ESG investing don’t ease their fears, either.
Peirce says she and her colleagues can certainly help build a “world that is greener, cleaner, healthier, and more prosperous.” She has three ideas of her own:
- Publish “updated guidance to help issuers think through how the existing disclosure regime already reaches many ESG topics and to address frequently asked questions that arise in connection with the application of the existing disclosure regime.”
- Consider offering “Commission-level comfort about forward-looking statements along the lines of what former Chairman [Jay] Clayton, Corporation Finance Director Bill Hinman, and Office of Municipal Disclosure Director Rebecca Olsen did in connection with COVID-19.”
- “Work with investment advisers using ESG strategies and products to ensure that investors understand what that adviser’s brand of ESG means in theory and practice.”
Strict new ESG disclosure rules, Peirce worries, will only make things worse.
How are you managing ESG disclosures? Share your ideas by e-mailing Bill.