SEC Commissioner Hester M. Peirce expressed concern regarding the accuracy of experts and criteria for assessing a company's environmental, social and governance ("ESG") factors.
In a speech before the American Enterprise Institute, Ms. Peirce warned that corporations may be awarded unfairly low ESG scores based on current practices. Other than governance, which according to Ms. Peirce "at least offers some concrete markers," environmental and social categories are less easily quantified. Additionally, ESG ratings are based not on standard criteria across the markets, but instead on a "shifting set of trendy issues of the day." Furthermore, Ms. Peirce noted that the ambiguity around ESG is facilitating the growth of self-identified ESG experts, who operate with little oversight.
Ms. Peirce stated that this problem is exacerbated by the rising popularity of ESG ratings. According to one survey, 70 percent of U.S. investment advisors agreed that ESG considerations are critical to day-to-day investment activities. However, Ms. Peirce advised, based on the ambiguity of these ESG scores, market participants should be "wary of . . . cries [from] self-appointed, self-righteous authorities."
Commentary / Steven Lofchie
The notion that morality (or ESG) can be scored on an objective scale is problematic. Not only do we do not share a common view of what is moral, but the intensity of ongoing political differences makes obvious the divergence in our views of what is moral; thus any "ESG" scale is inherently subjective (or, even worse, to use Commissioner Peirce's term, a measure of what is "trendy"). See SEC Commissioner Advocates for Broader Range of Standardized Disclosure Requirements.
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