Securities Regulation Daily SEC Commissioner Peirce warns against using U.S. securities laws to achieve global ESG objectives
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Thursday, April 15, 2021

SEC Commissioner Peirce warns against using U.S. securities laws to achieve global ESG objectives

By Brad Rosen, J.D.

The outspoken commissioner expressed her deep concerns that adopting the European model and standards with respect to environmental, social and governance metrics would undermine the strength and vibrancy of U.S. capital markets.

In highlighting the daunting and ever-increasing number of issues surrounding ESG disclosure matters, SEC Commissioner Hester Peirce cautioned against employing prescriptive rule-based approaches to these problems, but rather urged that we look to our most precious resource, our people, to devise solutions to the climate-related challenges our societies face. In a public statement titled Rethinking Global ESG Metrics, Peirce decried the notion of enlisting the securities laws to achieve ESG objectives, a phenomena she described as "gaining traction among activists and policy elites with a particular emphasis on requiring disclosure of specific ESG metrics."

The peril of adopting common metrics. Peirce noted the mounting pressure to embrace a single global set of metrics, which would facilitate international capital flows and issuers’ reporting obligations. She observed that some people are urging the U.S. to closely align its rules with the Europeans who have been working on devising a comprehensive set of ESG disclosure metrics for quite some time. Others would like to see the U.S. rely on standards developed and governed by an international body, such as the work being contemplated by the International Financial Reporting Standards Foundation.

Although Peirce recognizes that the adoption of common metrics has a surface appeal in that it suggests a joint commitment to a better, cleaner, well governed society, the commissioner is wary. She believes taking such a path would result in severe adverse consequences. Her concerns include the following:

  • A single set of metrics will constrain decision making and impede creative thinking;
  • common disclosure metrics will drive and homogenize capital allocation decisions;
  • ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries; and
  • the result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services.

Undermining market processes. Peirce also expressed concerns that hampering the ability of the markets to collect, process, disseminate, and respond to price signals by boxing them in with preset, government-articulated metrics will stifle the people’s innovation that otherwise would address the many challenges of our age. She further observed, "[C]onverging standards would be antithetical to our existing disclosure framework, which is rooted in investor-oriented financial materiality and principles-based requirements to accommodate the wide variety of issuers."

Rejecting the European model. The European approach to ESG matters embraces the notion of double materiality, meaning that companies should report on financially material topics that influence enterprise value, as well as topics that are material to the economy, environment and society. Peirce stated, "The European concept of ‘double materiality’ has no analogue in our regulatory scheme and the addition of specific ESG metrics, responsive to the wide-ranging interests of a broad set of ‘stakeholders,’ would mark a departure from these fundamental aspects of our disclosure framework."

Asserting that the strength of our capital markets can be traced in part to U.S. investor-focused disclosure rules, the commissioner indicated that a stakeholder-focused disclosure regime would have negative consequences which include:

  • the imposition of new costs on public companies;
  • decreasing the attractiveness of U.S. capital markets;
  • distorting the allocation of capital; and
  • and undermining the role of shareholders in corporate governance.

Commissioner Peirce concluded her statement with stark and pointed warning—"Let us rethink the path we are taking before it is too late."

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