It’s widely anticipated that we’ll soon be seeing more action from the SEC on sustainability disclosure, including possibly a prescriptive ESG framework that draws on some global metrics. (See, e.g., this PubCo post and this PubCo post.) Trying to head those prescriptive ESG metrics off at the pass is Commissioner Hester Peirce—yes, she who once described “ESG” as standing for “enabling shareholder graft”—in her statement, Rethinking Global ESG Metrics. With Gary Gensler now sworn in as SEC Chair, the revised composition of the SEC does not bode well for Peirce’s mission. Peirce concludes her statement with the admonition, “[l]et us rethink the path we are taking before it is too late.” But has the train already left that station?
Peirce takes aim at the concept of imposing a prescriptive approach to ESG, particularly adoption of a single global set of metrics. In her view, while it sounds appealing to adopt a set of “common metrics demonstrating a joint commitment to a better, cleaner, well governed society,” those metrics would likely come with a number of potential adverse effects: “Common disclosure metrics, however, will drive and homogenize capital allocation decisions. A single set of metrics will 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.”
According to Peirce, “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.” In addition, she contends that “preset, government-articulated metrics” will impair the ability of markets to respond to price signals and cramp the public’s ability to innovate in ways that might address these challenges.
Perhaps most important to Peirce is that converging with or adopting global 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.”
Peirce eschews the European concept of “double materiality,” arguing that it “has no analogue in our regulatory scheme.” Moreover, she views the imposition of specific ESG metrics that are responsive to the interests of “a broad set of ‘stakeholders,’” to be inconsistent with the current disclosure framework, which she considers to be based on financial materiality focused only on shareholder interests.
Peirce attributes the strength of U.S. capital markets to “investor-focused disclosure rules,” and she concludes with her concern that this type of expansion of the disclosure requirements “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.”