SEC Commissioner Hester Peirce cautioned against a formulaic approach to environmental, social and governance ("ESG") disclosures and asset management strategies. In remarks at a "Virtual Roundtable on the Role of Asset Management in ESG Investing" hosted by Harvard Law School, Ms. Peirce said that asset managers should be able to describe their own approaches to the consideration of ESG, enabling them to attract "like-minded" investors.
Ms. Peirce explained that while she understands issuers and investors' requests for the SEC to establish a "standardized ESG disclosure framework," the SEC should adhere to its "tried and true principles-based disclosure framework." Ms. Peirce raised concerns that a prescriptive approach to ESG disclosures would, among other things:
- increase public company costs;
- be contrary to the SEC's "principles-based disclosure framework," which is "rooted in materiality";
- not guarantee consistency, as companies may apply ESG metrics to the specific characteristics of their "operations, judgments and assumptions"; and
- not necessarily eliminate the current, private ESG standard setters, which have no "clear winner" or consistent standard among them.
Ms. Pierce pointed out that even industries, such as real estate, that have embraced ESG reporting are not generally consistent in their reporting framework.
Ms. Peirce encouraged further conversation between market participants and the SEC regarding why a particular measure or metric would be applicable across all companies or within a particular industry.
Commentary
Commissioner Peirce suggests that those who believe that the SEC should mandate an ESG metric ought to put one forward for public view and comment. The difficulty of agreeing as to what constitutes ESG (or "the good") seems daunting. It may be even more difficult to come up with common and objective measures on the components of such a proposal.
Anyone attempting the task proposed by Commissioner Peirce may wish to look to Plato, who attempted to define "Good" in the Republic. Unfortunately, he came up with nothing that is readily applicable to the securities laws. (Note: Aristotle's skepticism of Plato's efforts may also serve as a useful caution.)
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