SEC Commissioner's Speech Rankles ESG Industry

Impact investing took a direct hit with a speech by Securities and Exchange Commissioner Hester Peirce delivered recently to the American Enterprise Institute, just before the July 10 Financial Services House Committee hearing on Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures.

The speech, which took on environmental, social and governance ratings and proxy voting especially, was seen by some in the impact investing business as anything from surprisingly uninformed to a call to action for the ESG industry to do better.

“As ESG investing has seen significant uptake among a variety of investors [such as UBS, TIAA, Blackrock, State Street] it’s importance and legitimacy have grown too,” said Jonas Kron, director of shareholder advocacy for Trillium Asset Management, which specializes in ESG investing. “As we’ve seen more of that, we’re also seeing pushback from corners that want to keep the marketplace in the 20th century. In that sense [the speech was] not a surprise.”

More direct was Jon Hale, global head of sustainable investing research for Morningstar, “One thing I’ve noticed about critics of sustainable investing is that they often seem to have no idea what they’re talking about,” he wrote in his blog, calling Peirce’s speech hardly “appropriate given the office she holds,” and “delivering an over-the-top broadside against ESG.”

One ratings agency leader was more sanguine: “The ESG industry can be happy the SEC talks about us. That’s a positive.”

Scarlet Letter?

Peirce, one of the republican commissioners on the SEC, likened ESG ratings to painting a scarlet letter on corporations that don’t comply.

“We are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world,” Peirce said. “I will focus specifically on the way in which corporations are assessed according to [ESG] factors. Here too we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on people.”

The gist of Peirce’s comments, other than to disavow ESG investing, was focused on the lack of standardized ESG ratings — a complaint many in the industry agree with. She also noted that proxy voting pushed by ESG ratings firms was a problem and has hurt corporations.

Hale would have none of it, stating “ESG evaluations are all about trying to gather facts and understanding their context,” he wrote. “ESG ratings are based on systematic frameworks and a plethora of indicators. They are focused on financial materiality and peer-group comparisons. The whole enterprise is about bothering a lot about facts and circumstances. The goal is to produce actionable information for investors. No one would take ESG ratings seriously if they didn’t ‘bother much’ about facts and circumstances.”

The data ratings leader saw the speech more as a “call to action,” in which he noted there are a lot of rating differentials. “This is something we have to do as an industry.”

Fran Seegull, executive director of the U.S. Impact Investing Alliance, told ThinkAdvisor that Peirce had some points, such as the need for “common terms, common standards, and in managing and disclosing information.”

In a webinar focused on investor-driven ESG disclosure the same week as Peirce’s remarks, Matthew Welch, president of the Sustainability Accounting Standards Board, noted that with the “huge gap between book value of a company and market value, investors are looking for information not contained in the annual report. ESG is a big part of that.”