While a recent survey of CEOs (discussed in this PubCo post yesterday) showed increasingly favorable reactions to ESG and its potential impact—transforming ESG “from a nice-to-have to integral to long-term financial success”— what about CFOs? According to this survey of CFOs from CNBC, they’re just not all that into it. Granted, this survey of CFOs was minuscule compared to the KPMG survey of CEOs—actually, compared to any survey. But the results were strikingly different. CNBC labeled it an “ESG backlash.”
CNBC said that the survey was conducted in the second half of September with responses from 21 CFOs, including CFOs from many Fortune 500 companies (44%), and half of those are Fortune 100 companies.
According to CNBC, executives might present a positive outlook on ESG to the public, but take a dimmer view behind the scenes: in “public, U.S. corporations say the right things about environment, social and governance factors as part of their mindset….Inside the C-suite, there is concern about the value of ESG metrics, while there is also support for recent political pushback against ESG” by some state leaders. Respondents expressed frustrations “with both regulators and asset managers when it comes to current ESG momentum. CFOs are always worried about over-regulation.”
Of course, the new climate proposal from the SEC loomed large. The survey showed that only 25% of CFOs surveyed supported the SEC’s climate disclosure proposal, while 55% were opposed and 35% were strongly opposed. CNBC did note, however, a split between technology companies that see ESG as an opportunity, and a broader group of CFOs who are “struggling to understand how the costs their companies will incur in making new disclosures will generate a return on investment—and how the disclosures will both be used by investors in stock selection and generate value for investors.”
According to CNBC, a critical issue for CFOs with regard to the SEC’s climate disclosure proposal is financial materiality—“the lack of a clear correlation between the climate data and financial statements.” And here, the proposed requirements, in effect, “make a blanket assertion across industries like greenhouse gas emissions.”
Former SEC Chair Jay Clayton, quoted in the article, suggested that CFOs need “to be candid with investors and stakeholders about this disconnect. ‘Don’t be aspirational. Don’t say it is more than it is, or less than it is. … Here are the numbers and we’re trying to figure out how to use them,’ he said.”
On the whole, he appears to be advocating for a more principles-based approach, contending that the proposed required data may not actually be the most useful disclosure about climate risk in every case: “‘Proponents are saying we need to do something here because there are costs that are coming to companies in the economy if we don’t understand carbon transition better. Then the next question is how do we understand it better? … The SEC is speculating that general GHG disclosure will facilitate that understanding. Requiring information with the expectation or hope that it will be meaningful to investors is an uncommon approach to disclosure mandates.’”
As an example of a company for which GHG emissions may be less relevant disclosure, Clayton cited property and casualty companies. For that industry, he said, “a company analysis of global greenhouse gas emissions, as well as temperature and sea level rise, in the decades ahead” may offer more insight about climate risk. “‘They will have to do the work and produce the numbers.… But there is a better place to have a dialogue….Here is how we model sea level rise and what it means for our book. That’s much more relevant.’…For many companies that will have to comply with the new disclosure requirements, he says it may be better for their investors and stakeholders if they go further and outline the most relevant climate factors for their business—which may not be their own emissions.”
But to another commentator, a former hedge fund CEO, it’s not the time to argue about the financial materiality of climate disclosure. Her experience at an investment management firm during a prior regulatory battle over credit exposure disclosure requirements left her “skeptical of the view that the new disclosure is too costly or complex.” In her view, it’s important to make the disclosure and have the proper policies, procedures and people in place to manage it well. She believed that “cost should not be viewed as an impediment.” Companies that have to make disclosures “’should be thinking about the cost of not becoming more concerned and focused on it as a company.’”
With regard to the views of CFOs regarding the political pushback by state leaders against ESG stances by companies and asset managers, 45% of CFOs said that “they supported the moves by states to ban investment managers that use ESG factors from state pension fund business. While 30% of CFOs said they were neutral on the issue, only 25% of CFOs said they opposed the state moves, and only 5% expressed ‘strong’ opposition.” The CEO of an ESG research non-profit attributed the negative reactions by CFOs to ESG rating companies: “It’s that ESG ratings drive companies crazy….They’re not transparent, they are total black boxes….We don’t know who is using them, and there are no standard metrics and no validation of the underlying data, so the ESG community itself has created a lot of its own problems….But I do think investors, including pension funds and asset managers, who see the risks and opportunities, and investment relevance through an ESG lens…that’s real, that needs to be properly analyzed.”
The article also speculated that another reason for the negative reaction may be proxy battles: given the ownership levels of large index fund managers, they “have come to dominate investment flows and represent as much as one-third of the shareholder base of companies.” The article asserts that “they have been increasingly using that power to influence the outcome of shareholder votes on ESG issues, and on climate most prominently.”
