SEC commissioner argues for tailored approach to ESG

April 23 2021

The financial services sector needs to “rethink our prescriptive approach” to environmental and societal problems, according to a leading US regulator.

Hester Peirce, a commissioner at the Securities and Exchange Commission (SEC), argued for more nuanced solutions and for the US to retain its investor-focused regulatory system, in her comments first published in Eurofi magazine.

”The task before us is to find a way to bring about lasting, positive change to our countries on a range of issues without sacrificing in the process the very means by which so many lives have been enriched and bettered,” said the commissioner.

Peirce, appointed as a commissioner by former president Donald Trump and sworn in in 2018, said that a “single set of metrics” on environmental, social, and governance (ESG) issues would constrain decision making and impede creative thinking.

Unlike financial accounting, which lends itself to a common set of comparable metrics, ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries. “The result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services,” Peirce said.

Innovation could help address the many challenges facing society, she continued. “Converging standards would be antithetical to our existing disclosure framework, which is rooted in investor-oriented financial materiality and principles-based requirements to accommodate the wide variety of issuers.”

The Commissioner added that “double materiality” – which she referred to as a “European concept” – did not fit with the US regulatory system. Incorporating ESG metrics to cover “the wide-ranging interests of a broad set of stakeholders” would mark a departure from the traditional US framework, she said.

Peirce concluded: “The strength of our capital markets can be traced in part to our investor-focused disclosure rules and I worry about the implications a stakeholder-focused disclosure regime would have.

“Such a regime would likely expand the jurisdictional reach of the Commission, impose new costs on public companies, decrease the attractiveness of our capital markets, distort the allocation of capital, and undermine the role of shareholders in corporate governance.

“Let us rethink the path we are taking before it is too late.”

Separately, the SEC’s Division of Examinations has published a “risk alert” relating to the ESG claims made by registered investment advisers and investment fund providers.

In an accompanying statement, Peirce noted that “many financial firms are finding gold in the green—they are offering ESG products because it is lucrative to do so”.

As with any other investment strategy, however, advisers and funds “should not make claims that do not accord with their practices, and our examiners will be looking for that consistency between claims and practice”, she said.

The commissioner emphasised that this did not mean ESG offerings were being seen as different or unique in the eyes of the regulator.

Last Updated: 23 April 2021