By Lene Powell, J.D.
In pointed remarks, SEC Commissioner Hester Peirce found fault with mandatory standards for environmental, social, and governance (ESG) disclosures, saying regulators’ true aim is not to bring about comparability or consistency, but rather to direct private capital flows toward government objectives. Peirce warned that “fallible regulators and herd-prone investors” could cause a “green bubble” and fail to solve problems ESG investing is meant to address.
“[ESG standards] are meant not primarily to serve investors’ needs but rather to direct the allocation of private capital to further government ends,” said Peirce.
Peirce gave the remarks at a Eurofi event on April 28 in Stockholm.
No need for new standards. Peirce began with a critique she has made before, that ESG-specific standards are not needed. Companies, asset managers, and investors always have considered a wide range of factors in investment decisions, and materiality-based disclosure standards already provide necessary information, she said.
Peirce noted that “ESG is an ambiguous term” and did not provide a definition. Generally, ESG investing is seen as a framework for evaluating environmental, social, and governance factors that can cause financial risk. It can form the basis of investment strategies with the aim of optimizing financial returns or promoting sustainability goals.
Serving government, not investors. Peirce stated that too often, ESG disclosure standards do not serve investors’ needs, but instead government ends. In the commissioner’s view, mandatory ESG standards appear intended to direct capital flows to further government ends. This is especially true when combined with sustainable finance initiatives designed to encourage financing of favored activities and the defunding of disfavored activities, she said.
“This commandeering of private capital in the name of ESG causes me grave concerns,” said Peirce.
Peirce did not detail how mandatory disclosure standards force capital to flow to government-desired ends.
Leave technocrats out of investing. According to Peirce, ESG is an “impossible” effort by “brilliant people in tidy conference rooms far removed from the nitty-gritty complexity of the world” to classify all of economic activity in terms of its effect on an increasing number of complex, sometimes mutually contradictory, metrics.
Not even the most capable regulators advised by the most qualified experts can advise about the viability of climate solutions, she said.
“Collecting bushels of data to measure the unmeasurable and quantify the unquantifiable is an unreliable basis for deciding where to send capital, even if all these data create the illusion that we understand the world and how humans live and work in it,” said Peirce.
“Green bubble.” Peirce warned that moving capital to government-designated sustainable activities could create a “green bubble” within the financial system as investors pour money uncritically into green asset. She said investors are complaining about the lack of investable assets, and the search for investable assets may cause them to forgo standard risk management precautions.
Asset bubbles always pop, said Peirce. Compounding the fallout, standards likely will lead to underfunding of activities that could produce real change but that do not fit within ESG taxonomies, she said.
“The messy economic aftermath may not even be softened by the consolation that these standards brought us closer to solutions to any of the problems these taxonomies were designed to address,” said Peirce.
Global ESG standards would cause systemic instability. Global convergence in ESG standards could create a global asset bubble, said Peirce.
“Any problems in the taxonomy—favoring harmful activities or disfavoring socially useful activities—will reverberate through the whole world, rather than being confined to a particular jurisdiction,” said Peirce.
Also, regulators will have a difficult time writing standards that apply equally well everywhere, stated Peirce. Global standards could miss important nuances about the physical, legal, social, and cultural environment where an activity occurs.
On a final note, Peirce expressed concern that applying standards extraterritorially, would undermine national sovereignty and the rule of law.