Statement Summary
The press release outlines the concerns of an SEC Commissioner regarding the global ESG (Environmental, Social, and Governance) movement, claiming it is detrimental to investors, companies, and regulatory integrity. The Commissioner argues that the ESG labeling often leads to a misguided assumption of materiality, compelling companies to implement generic ESG frameworks rather than tailored financial analyses regarding their long-term value. This blanket approach results in inefficiencies and distracts from core financial objectives, while also creating potential litigation and compliance costs. The release notes ongoing shifts within the U.S. and Europe to reassess ESG regulations, suggesting a return to focusing on true materiality in financial disclosures. Ultimately, it emphasizes the need for a more discerning perspective on ESG-related mandates to better serve genuine societal and investor needs.
Original Statement
Thank you, Christian. I appreciate the chance to be part of this event. I must first let you know that my views are my own as a Commissioner and not necessarily those of the U.S. Securities and Exchange Commission (“SEC”) or my fellow Commissioners. Speaking of my views, they may not overlap much with those of Theodor Adorno, the famed early 20th century intellectual whose legacy is so prominent at this university. But his assertion that “progress occurs where it ends” aptly describes my views of much of the global environmental, social, and governance (“ESG”) movement.
The ESG era, though marketed as progress, has harmed investors, companies, regulators, and society. Nothing is new about companies and investors taking a wide range of factors into account in deciding how to allocate capital. The materiality framework of our U.S. securities regulatory regime elicits disclosure about issues determinative to a company’s long-term financial value, including, when applicable, ESG issues. Our framework distinguishes between what is material to an investment decision and what is not material even though some investors might care deeply about it. Only the former warrants mandatory disclosure.
The distinctive element that marks this new era is the presumptive categorization of anything bearing the ESG label as inherently material to long-term financial value. In doing so, it departs from a near-century-old materiality-based disclosure regime. If ESG is treated as a short-hand for materiality, affixing the ESG label to something automatically justifies using it to drive capital allocation decisions. An ESG label substitutes for hard analysis by companies and investors about how something relates to long-term financial value.
The current approach to ESG is harmful because it takes a one-size-fits-all approach to regulation. Instead of capital allocators performing individualized analysis of ESG criteria, they are given a box-checking exercise composed of generic metrics and criteria concocted by a hodge-podge of interest groups. As a result, focused financial analysis is burdened by irrelevant and misleading red herrings, which may lead to worse financial decisions.
Societal and Regulatory Implications
Let’s start with societal harm. ESG initiatives—even when couched in terms of disclosure—attempt to shift capital flows to uses favored by politicians, regulators, and powerful interest groups as embodied in the taxonomies that drive corporate and investor activity. These favored industries and companies are more likely to correspond to lobbying prowess than to the ability to improve society. Capital diverted to pet projects of the politically powerful is not available for companies working hard to meet people’s genuine needs or to solve society’s most pernicious and pressing problems.
Regulators, often driven by good intentions, have poured countless hours into devising and implementing ESG frameworks. Central banks, securities regulators, and insurance regulators scour their rule books for ways to inject ESG targets into their regulated entities’ decision-making, so that money flows to ESG-positive projects. A sustainability standard setter now sits alongside the international accounting standard setter, which may lead to unwarranted confidence in the sustainability standards and unwanted degradation of the accounting standards.
International organizations of regulators have packed their agendas with ESG work streams. Regulators’ other responsibilities have suffered from the attention given to ESG. For example, the climate rule consumed a tremendous amount of time and resources that could have been devoted to modernizing the disclosure rulebook. Bank regulators’ focus on climate risk may obscure other risks.
Impact on Companies and Investors
The time and money regulators spend on ESG pales in comparison to what companies have spent. ESG initiatives from every level of government, reinforced by grifting and silver-tongued sustainability sirens, consume tremendous amounts of corporate resources. Employees across the organization spend time collecting and analyzing ESG data—time which otherwise would be directed toward corporate value maximization.
Investors also have suffered from the ESG obsession. If ESG targets supplement financial goals for companies, holding company managers accountable for their performance may be difficult. Managers can claim success based on one of the company’s ESG metrics even if the company has failed to meet its goals related to maximizing long-term value. Further interfering with accountability, investors may find it hard to locate material information in disclosures brimming with mandated ESG items.
Regulatory Reassessment
Recognizing the dangers of an unthinking embrace of everything ESG, the United States has paused to assess its approach. States have raised questions about how asset managers are taking ESG objectives into consideration in managing state investment portfolios. Change is also happening at the federal level, as the U.S. Department of Labor will engage in new rulemaking to rescind ESG rules adopted under the prior administration.
Europe too seems to be looking at its ESG regulatory framework with an eye toward streamlining it. Absent such streamlining, Europe could suffer economically. It is also worthy of reconsideration the imposition of Europe’s ESG mandates and regulations on American companies, which threatens to spread economic malaise globally.
I look forward to a lively upcoming conversation. In this exchange of ideas, I hope that we can honor the legacy of Doktor Adorno in terms that are accessible to people like me who are not steeped in the erudite political, artistic, and philosophical discourse that flowed so readily from his pen.
