Regulatory Policy

Voluntary ESG Disclosures Not Enough for the Feds

Commissioner Allison Lee participates in an SEC open meeting to propose changing its decades-old definition of an “accredited investor” in Washington, D.C., December 18, 2019. (Erin Scott/Reuters)
Why is the government insisting on costly federal mandates when voluntary industry agreements are making them unnecessary?

Dozens of companies, including some of the best-known consumer brands, recently signed on to a new system of rules for reporting on environmental, social, and governance (ESG) topics. These charter supporters of the “stakeholder capitalism metrics” have pledged to disclose firm-level information on everything from workplace injuries to greenhouse-gas emissions. While issued by the World Economic Forum’s (WEF) International Business Council — which is not usually popular among advocates of free-market economics — these guidelines are at least voluntary. Whatever Davos-style errors are rolled into this “stakeholder” framework, it demonstrates that government regulation over many of these areas is ultimately unnecessary. Will policy-makers take heed?

Before he left the agency at the end of last year, former Securities and Exchange Commission chairman Jay Clayton noted a “growing drumbeat for ESG reporting standards.” Indeed, many industry observers have become frustrated with the proliferation of multiple, inconsistent systems for ESG disclosure and measurement. That is a problem, given that at least $30 trillion in assets are ostensibly being managed according to ESG principles, and the market for data and analysis regarding those investments alone is expected to hit $1 billion this year.

This increasing web of guidelines has put pressure on ESG advocates to coalesce around a single standard. Several have already been vying to become the one ESG framework to rule them all. The United Nations–affiliated Principles for Responsible Investment, the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Prince Charles–sponsored International Integrated Reporting Council are all influential contenders whereas the Climate Disclosure Standards Board and the Michael Bloomberg–chaired Task Force on Climate-related Financial Disclosures provide climate change–specific guidelines.

It remains to be seen whether the WEF’s new system will bring balance to the force, but having some big names on board — including Bank of America, Fidelity, Nestlé, PayPal, Unilever, and the “big four” accounting companies Deloitte, Ernst & Young, KPMG, and PwC — gives it a major leg up.

But will these other organizations agree to relinquish their own claims to the ESG crown? In the introduction to the report announcing its new metrics, the WEF’s International Business Council cites the statement issued last year by the other major standard-setters “detailing how their work and the IBC’s project are fundamentally complementary and could form the natural building blocks of a single, coherent, global ESG reporting system.” It also includes a quote from former Bank of England head Mark Carney, encouraging “governments, regulators, the official accounting community and voluntary standard setters to work with the IBC.” (Carney has since become a vice chairman at Brookfield Asset Management and head of the firm’s ESG and impact fund investing. He also holds advisory roles for both the U.K. and U.N. relating to the question of climate change and finance.)

If we are in fact heading toward a single framework for corporate disclosures on ESG themes, then one of the major arguments for government regulation goes away. In fact, the term “regulation” originally referred not to the bewildering minutiae of government mandates we now have (e.g., all imported tomatoes must be at least two and nine-thirty-second inches in diameter), but to the efforts to “make regular” commerce under a consistent set of rules that could maximize efficiency and minimize confusion. There are, of course, cases in which advocates of government regulation argue that collective-action problems make self-regulation in a particular industry problematic, but the goal should always be efficiently operating markets, not more government power per se. We should embrace the least disruptive and expensive solutions, not the most “energetic” ones.

This is especially true given the narrative being advanced by ESG advocates themselves. We are told that ESG disclosures would make the corporate world not just more ethical but smarter to boot. Managing previously unmeasured risks will guide firms and their boards toward greater success, and being socially responsible won’t be a concession but a path toward even higher profits. Bank of America, one of the top corporate co-signers of the IBC’s new framework, says on its website that “ESG practices can create a culture of responsibility, sustainability and innovation; all of which can enhance a company’s long-term outlook.” If all of that is true, we should expect corporations to not just accept such guidance but actively cultivate and propagate it voluntarily, in their industries and trade associations.

But Biden administration nominees may be about to push through federal mandates at exactly the time that voluntary industry agreements are making them unnecessary. As I’ve previously written, the Biden team appeared from the beginning to be moving strongly in the direction of even more politically directed investing. In January, President Biden named SEC commissioner Allison Lee as acting chair. Commissioner Lee noted in a press release at the time that “I have focused on climate and sustainability, and those issues will continue to be a priority for me.”

That’s an understatement. In an op-ed for the New York Times in September 2020, she wrote:

Both investors and the broader public need clear information about how businesses are contributing to greenhouse gas emissions, and how they are managing — or not managing — climate risks internally. Realistically, that can happen only through mandatory public disclosure.

Despite major moves among the world’s largest companies (which had been in the works well before her op-ed on the topic), to accomplish the very goals she describes voluntarily, Commissioner Lee and other ESG advocates are still insisting on costly mandates. When the powers that be refuse to take yes for an answer, it’s difficult to come to any other conclusion than that they’re insisting on more government power for its own sake.

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