Tuesday, July 20, 2021

Better Markets doubles down on the need for ESG disclosure regulation

By Amanda Maine, J.D.

In a new white paper, advocacy group Better Markets outlined the importance of environmental, social, and governance (ESG) issues and how the SEC can improve its approach to ESG. Better Markets has been active in voicing its desire for increased ESG regulation, including in a comment letter in response to then-Acting SEC Chair Allison Herren Lee’s call for input on the SEC’s approach to a new disclosure framework for climate-related disclosures.

Why ESG matters. The white paper points out that investors held over $37 trillion in ESG assets at the end of 2020, which could grow to $53 trillion by 2025. The number of exchange-traded funds (ETFs) and other financial products that are designed to track ESG criteria offered by brokerage companies and mutual funds have also increased, Better Markets advised.

According to Better Markets, the ESG movement matters for a number of reasons, including that it better equips investors to allocate their capital in accordance with their personal values. The movement towards ESG investing can also induce positive changes in society that increase sustainability, fairness, and quality of life by equipping policymakers with more granular information relating to ESG issues, Better Markets stated. "To the extent profit-seeking companies see value in taking steps to prevent the ongoing degradation of the environment, address racism and sexism, reduce income inequality, and prevent fraud and other corporate malfeasance, all at the insistence of profit-seeking investors, the results will be market-based solutions, or at least mitigants, of some of our societies’ most vexing problems," the white paper proclaimed.

Beyond addressing the social ills of society, Better Markets remarked that focusing on ESG issues will help investors reap higher investment returns. While many investors seek out ESG investments because of their personal values, it has also been shown that companies that take ESG factors seriously offer better financial returns. For example, companies that are better prepared to deal with the impact of climate change will likely be a safer investment than companies that ignore the threat of climate change, Better Markets advised. The white paper also noted that companies that focus on diversity tend to do better than those that lag on diversity factors. Focusing on ESG is not a "fringe concern" for the SEC but should be central to its core mission of protecting investors, ensuring market integrity, and promoting capital formation, according to Better Markets.

Breaking down the E, the S, and the G. Tackling the environmental, social, and governance issues one by one, Better Markets praised the SEC for its recent activity in this space, including its request for public input on climate change disclosures, the creation of an SEC enforcement task force related to climate and other ESG issues, and a Risk Alert detailing observations from examinations of investment advisers that offer and manage ESG options. Proclaiming that the SEC "is on the threshold of a new ‘ESG era,’" Better Markets urged the agency to follow through with its intention to propose, finalize, and defend a robust climate-related disclosure regime for public companies and expand disclosure-related climate rules to private companies as well.

Regarding issues that fall under the "social" category of ESG, Better Markets said that the SEC still has a great deal of ground to cover through the securities regulation framework, including issues that involve racial justice. When the financial industry engages in predatory behavior, minorities suffer disproportionately, and more effective and focused initiatives are necessary from all of the financial regulators, Better Markets implored.

The white paper observed that the SEC’s Asset Management Advisory Committee recently met to consider a recommendation from its Subcommittee on Diversity and Inclusion. Among the "sobering" data reported by the subcommittee was the fact that less than 1 percent of assets under management in the $70 trillion global market are managed by minority-owned or women-owned firms, Better Markets reported. The white paper did note that the Commission intends to consider in October proposed rule amendments that would enhance registrant disclosures about the diversity of board members and nominees.

On governance issues, Better Markets called out the SEC for its recent rules relating to proxy advisory firms and shareholder proposals, stating that they severely limit the ability of shareholders to hold management accountable and to have a say on important corporate policies. However, the organization praised Chair Gary Gensler for announcing that the SEC would revisit the proxy advisor rule. It also heralded the SEC for reviving its 2016 proposal on a universal proxy rule. Better Markets also urged the SEC to finalize rulemakings on Dodd-Frank compensation rules regarding risky compensation incentives, clawbacks, and pay-versus-performance disclosures.