These past few years have been tidal, in the sense that ideas have become broadly perceived forces that sweep everyone standing on the beach up onto strange shores. This is not to say that the phenomenon is bad — but it does create lack of clarity as to the path forward.
Enter the acting head of the SEC, Allison Herren Lee, who has signaled that the SEC is headed towards far more granular ESG disclosure than present regulations and practices elicit. The reasons: investors have vastly increased interest in ESG, and the retail investor cannot get useful data from current practices. This thinking is consistent with the Biden administration’s prompt reversal of Trump guidance designed to devalue attention to ESG in the investment of retirement funds.
Disclosure often does force substantive change, so in a sense the SEC is a strong tool for corporate change. But that does not mean that the path forward is clear, even putting aside the view of supporters of the prior administration that ESG is not an important factor.
First, note that the pitch for better disclosure is couched in terms of aiding retail investors; they are of course not the primary market drivers. Second, to the extent funds invest for the retail investor, they compete on performance metrics and thus the proposition that ESG assists the bottom line is put to the asset test by the market-place. The ESG folks argue that ESG is better for the world and for profits. It is hard to argue against the benefit to the world, but as to profits: that is a work in process as to whether profits are maximized in the longer run. (One can hope so, but by definition we cannot measure today the bottom lines in a decade.) Third, as noted by Lee, funds often lend their shares and do not vote them at all when it comes to corporate meetings.
Shortly after the Business Roundtable call to ESG arms a couple of years ago, attempting to redefine the constituencies to which corporations should answer, the Harvard Governance Project sharply questioned whether that redefinition was going to get actual traction by action, as opposed to being just a PR-type thing to say. Without having enough data to speak today as to whether the Crimson Guys were correct, there is no doubt but that enhanced disclosure will drive one of two results: palpable change in corporate action, or investor fear driving retrenchment from social policy and a return to current “total shareholder return” thinking.