U.S. Securities and Exchange Commission acting Chair Allison Herren Lee is making the case for the regulator to develop a mandatory environmental, social and governance reporting framework for issuers to follow.
At a virtual event hosted by the Center for American Progress, Lee spelled out how a series of newly launched ESG-related initiatives at the regulator, including a new enforcement task force and climate-related examination priorities, is laying the groundwork for "a comprehensive ESG disclosure framework aimed at producing the consistent, comparable and reliable data that investors need." Lee, a Democrat, was appointed to lead the agency until President Joe Biden's pick for SEC chair, Gary Gensler, can be confirmed
"For a long time, so-called impact or socially responsible investing was perceived or characterized as a niche personal interest — the pursuit of ideals unconnected to financial or investment fundamentals, or even at odds with maximizing portfolio performance," said Lee. "That supposed distinction — between what's 'good' and what's profitable, between what's sustainable environmentally and what's sustainable economically, between acting in pursuit of the public interest and acting to maximize the bottom line — is increasingly diminished."
For years, shareholder advocates, environmental groups and progressive lawmakers have called on the SEC to ramp up its role in the fight against climate change. They have encouraged the agency to create disclosure rules that companies would have to follow when alerting investors to risks or opportunities their businesses face from ESG issues. These include the potential risks for offices in the face of extreme weather events, a business's carbon footprint — or even the diversity of its management team.
And while some companies in the U.S. follow voluntary frameworks created by the likes of the Task Force on Climate-related Financial Disclosures, investors say the lack of uniformity across the board complicates their ability to use that information when deciding what securities to buy and sell.
Now, with some of the world's largest asset managers such as BlackRock Inc. and State Street Global Advisors Inc. emphasizing ESG products and Democrats in control of Congress and the White House, demand for a standardized corporate ESG disclosure framework is louder than ever.
"Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever," Lee said. "That's why climate and ESG are front and center for the SEC."
A late 2020 report from the U.S. Forum for Sustainable and Responsible Investment found that sustainably invested assets had grown 42% from 2018 to 2020, totaling about a third of the overall assets under management in the U.S.
The SEC is not likely to face an easy path to introducing an ESG disclosure system, though. Two of the Republican officials on the agency's top panel, Commissioners Hester Peirce and Elad Roisman, have already questioned how meaningful the SEC's recent ESG announcements actually are.
"What does this 'enhanced focus' on climate-related matters mean? The short answer is: it's not yet clear," Peirce and Roisman said in a joint March 4 statement. "Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist? Time will tell."
Ultimately, the SEC's development of a uniform ESG reporting system will likely fall on the shoulders of Gensler, the former Commodity Futures Trading Commission chair who was tapped by Biden earlier this year to lead the SEC.
The hard-charging regulator who guided the CFTC in the wake of the 2008 financial crisis will be responsible for the SEC's agenda as chair, if confirmed, and Gensler has already indicated an openness to directing the SEC to consider new climate risk disclosures.
"It's the investor community that gets to decide what's material to them. It's not a government person like myself. It's all about the reasonable investor and do they think it's significant in the mix of information," Gensler told lawmakers in early March. "In 2021, there are tens of trillions of dollars of invested assets that are looking for more information about climate risk, and I think then the SEC has a role to play to help bring some consistency and comparability to those guidelines."