Commissioner Roisman’s Bad Take on ESG

From Commissioner Roisman’s speech to the Society for Corporate Governance. Let me respond to his mystification at the grouping of E, S, and G (environment, social, and governance): those are three key areas of risk and assets that are inadequately, if at all, represented by current accounting principles, which is why groups like GRI and SASBE are developing exactly the kinds of formats for making this information consistent that the Commissioner seems equally mystified about. His insistence that there is some separation between this information and the kind of information we get on 19th-century-founded GAAP about hard assets is deliberately obfuscatory. If he answered the questions investors are asking instead of the questions he prefers to pretend they are asking, he would not be able to avoid the right answer on ESG.

First, let me level-set: In my experience, there is not consensus on what, exactly, “ESG” means. I often wondered how the three concepts of environmental, social, and governance matters got lumped together. When I looked into it, I saw that it was relatively recently that socially responsible investors, focusing on “E” and “S” issues, rebranded to add “governance” to the mix, a component that had research tying it to firm value.[1] In my mind, corporate governance stands by itself and rarely has a direct relationship to environmental or social issues. Best practices in corporate governance are usually the result of many years of private ordering experimentation and experience. Also, governance reform focuses on the company itself and what is best for its optimal operation as well as its shareholders. The same is not necessarily true of “E” or “S.” Those matters tend to be more society, or stakeholder, focused. For example: How is the company “doing its part” to combat climate change or address global and political matters?

An obvious problem with mandating ESG disclosure is that the issues under this enormous umbrella of a term are usually subjective and constantly evolving based on current events. Because of this evolution, requiring prescriptive disclosure would be difficult. Who is in a position to codify a list of environmental or social issues for the foreseeable future?[2] Presumably, that list would change as society changes and as companies change. If the SEC had tried to codify a list just ten years ago, I think it would look different than any list we would make today or ten years from now.

I understand that many of you in attendance who work at public companies face pressure to disclose or act on ESG-related issues. I read about and have heard directly from activists, large investors, company advisors, politicians, and others who have demanded certain actions or information from your companies. I hear about the various ESG rating firms who send time-intensive surveys and assign scores to your businesses based on metrics that wildly differ from each other. I also know that you spend a meaningful amount of your time responding to that demand. Many public companies voluntarily provide some form of corporate social responsibility or sustainability reports to investors—by voluntarily, I mean companies are not required to do so by the SEC or other government mandate. I am happy to see this sort of private ordering take place. It is important to realize and acknowledge that companies provide information and act without the government telling them to do so for many different reasons, including because their customers, employees, and others motivate them to do so. Sometimes, a company may deem certain ESG information material, such that it is disclosed in SEC filings. Other times, the company does not believe it rises to the level of materiality, and thus it is not included in SEC filings.

As a Commissioner, I too have felt increasing pressure from advocacy groups, politicians, and some investor groups to support rules that explicitly require public companies to disclose a wide range of ESG information in their SEC filings. In fact, the SEC’s Investor Advisory Committee (“IAC”) recently recommended that the SEC amend the reporting requirements to include ESG factors.[3] I appreciate the time and consideration our IAC members put into their recommendations. I would note that these are recommendations, not mandates, and they are meant to aid me and my fellow commissioners who have been appointed to make policy decisions for the agency.[4]

Everyone, Stop Grandstanding

In my experience, some advocates try to make ESG an issue of morality or politics. I have heard ESG policy proponents portrayed in varying lights, ranging from responsible stewards steeped in science to thinly veiled political operatives pushing their own agenda. Opponents of prescriptive ESG policies are also portrayed in varying lights from responsible stewards skeptical of allowing changing mores to dictate investment strategy to uneducated and morally inferior denialists. It is too easy to fall into the trap of categorizing people in ways that obviate the need to address the substance and merits of ESG issues. But, this makes policy discussions turn personal and almost always less productive. Also, increasingly, there has been a desire from some quarters to conflate greater societal debates about environmental regulation and social policies with public company disclosure requirements. However, I believe it is important to differentiate these policy areas, as they involve different policy-makers and different goals. Only by acknowledging this broader context of how we often confront ESG topics, will we be able to have more objective and productive policy discussions.

ESG Mandates: When Securities Laws Get Personal

I have given the matter of SEC-mandated ESG disclosure a lot of thought, and I have serious reservations about imposing prescriptive requirements in this area. In my experience, and based on the many discussions I have had on the topic, this type of mandated disclosure is often fraught with subjectivity and agendas that are often unrelated to “investor welfare.” In other words, I have seen too many people appear to blur their personal views on environmental and social issues with how they believe the federal securities laws should operate to regulate the actions of others. Normally I keep my personal life out of my speeches, but in this case it seems illustrative to reference the fact that I personally have strong convictions on certain ESG matters. For example, I believe that human behavior, including through business operations, has an impact on our environment and we should think about what we can do to reduce pollution and conserve our great natural resources for future generations. I organize my actions in my personal life around this and other beliefs.

I believe it is important that I distinguish such beliefs and actions in my personal life from those that drive me as an SEC Commissioner and regulator. I was appointed to this position to support the mission of the SEC—protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.[5] This agency oversees and enforces the federal securities laws, which have a relatively narrow scope, even if the effects are sometimes broad. These two items, scope of authority and effect of actions, should not be confused. In particular, we should be aware of the effects of our actions, and we should not try to expand our authority in order to amplify those effects. Let me be specific. If I were to use the securities laws to pursue my own environmental and social vision for the world, I would be subordinating the SEC’s mission to my personally held objectives. In other words, I would be acting outside the scope of my responsibility and authority. Imagine the unintended consequences that could flow from such an abuse of power.

One Comment Add yours

  1. David Arenas says:

    Governance as an exercise of “private ordering experimentation and experience” has utterly failed to provide the leadership and fair representation of the communities where these businesses cater, serve, and make profit from, hence the need to also shake up the G.

    David Arenas


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