An Honest Conversation about ESG Regulation

Good morning.  I will start by noting that my remarks are my own and do not necessarily represent the views of my fellow Commissioners or the Securities and Exchange Commission (“SEC”).

AMAC’s Careful and Collaborative Approach

Thank you, Ed [Bernard] and members of this Committee, not only for your work, but for the thoughtful process you have undertaken to develop recommendations for the Commission.  AMAC’s approach has been methodical, iterative, and transparent: discussing complex issues, developing subcommittee recommendations in draft form, presenting those ideas to the full Committee, and inviting a lot of engagement.  While such an approach may not yield quick results—and it likely demands increased time and attention from each of you—it provides opportunities to consider new perspectives and new information.  Ultimately, I believe it should make any final recommendations you adopt more comprehensive and useful for the Commission itself.

New Potential Recommendations from the Diversity and Inclusion and Private Investments Subcommittees

Today, I look forward to hearing new potential recommendations, including ideas from the subcommittee on Diversity and Inclusion on how the Commission can help advance diversity and inclusion in the asset management industry.  I am especially interested in whether our securities laws or rules inadvertently create barriers and what we can do overcome those.

From the Private Investments subcommittee, I look forward to hearing your ideas on increasing retail investors’ access to investing opportunities in the private market.  Over this past year, we have seen retail investors embrace trends, such as SPAC investments and day trading.  While some will always want to “go-it-alone” in their search for growth opportunities, I am interested in how professional managers can provide more guided access.

Exploring the ESG Subcommittee’s Preliminary Recommendation

For the remainder of my remarks, I will focus on ESG, in anticipation of the panel discussing the subcommittee’s preliminary recommendation from December 1, 2020.[1]   Many thanks to Ed and the ESG subcommittee for engaging with my team over the past several months.  Like many others at the Commission, I am passionate about our capital markets and want to ensure that investors are getting the material information they need to make investment decisions—regardless of whether the information is characterized as “ESG” or not.

Before I go through several questions I would like to pose for our panelists, let me express my hope that today’s atmosphere will foster an open-minded dialogue about the substance of the subcommittee’s preliminary recommendation.  ESG is a topic that can feel polarizing.  I have heard from some, who feel inclined to question the propriety of SEC regulation in this area, that they fear the reputational risk of being painted as “anti-climate,” “anti-social justice,” or other shades of immoral if they express their critiques publicly.  On the flip side, proponents of this agency’s intervention sometimes offer rationales for action that are entirely outside the realm of securities law.  A letter recently arrived at my office advocating for mandatory ESG disclosures and ended by saying: “There is no Planet B.” 

It is entirely reasonable for a person to feel that climate change deserves immediate attention from lawmakers and still question whether the SEC mandating new disclosures from U.S. public companies is an appropriate step for the agency.  In this forum, I feel confident that we all recognize the fundamental questions here are about the SEC’s authority as a regulator and whether this agency’s intervention is appropriate to address the problems people have identified in our markets.  This is an entirely healthy and necessary conversation, and it will be critical for us to have the full spectrum of market participants engaged.  If the only people who feel safe to comment are those who want the agency to join the fight against climate change and those whose business models would benefit from new regulation, we will miss hearing from those voices who can alert us to the hidden costs and unintended consequences of our actions.

With that said, I am happy to hear from our expert Committee members today and welcome new panelists to join the dialogue.

Questions for the asset managers

I will start with my questions for those panelists who represent asset managers:

• How have you gauged what investors are looking for when it comes to ESG products?  People have invested now around $2 Trillion into funds labeled “ESG,” “green,” and the like.[2]  But, it is not clear to me that we understand these investors’ objectives, which (as the subcommittee’s preliminary recommendation states) may fall outside risk/return alone.[3]  How do you design and market products tailored to investors’ interests?
• To the extent you are focusing on minimizing risk and achieving high returns, what E, S, and G information specifically do you believe you need from issuers, and why?  How is this information related to valuing potential targets for investment and valuing portfolio companies on an ongoing basis?
• I would like to understand how asset managers are currently seeking out this information.  I know some request companies provide SASB or TCFD disclosures, or they seek the information in a different manner.  How do you choose which approach to take?
• How have European disclosure mandates, such as the Sustainable Finance Disclosure Regulation, factored into this decision-making?
• To the extent that you are looking to increase comparability of issuers’ disclosure, why is this important in the case of ESG?  In other contexts, we do not demand perfect comparability across all categories of material information.

These questions are all relevant to the concept of materiality—figuring out exactly which ESG information is material is a threshold issue for me as I think about the SEC considering new disclosure requirements. 

For Everyone

The next questions are for all panelists and our moderator.  The subcommittee’s preliminary recommendation contemplates that the SEC rely on a third-party standard setter to identify what information is material.   How should the SEC oversee such a third party?  Should we extend our oversight further, for example, to ESG-index providers and ESG-rating agencies, since so many “ESG” funds and investment products are derivative of their work?

For Companies

The remainder of my questions are for those panelists who represent public companies.  The bulk of the obligations in the subcommittee’s preliminary recommendation would fall on your shoulders.  How could the burden could be mitigated for companies who are working with investors to provide them with ESG information?  I understand that liability is one concern, and there may be others.  Were the SEC to require new ESG disclosures, should we consider allowing them to be furnished rather than filed?  Should we consider a safe harbor, dependent on particular conditions such as the presence of cautionary language?

Conclusion

While I am nowhere near the end of my questions, I will stop here for now.  I look forward to the discussion today, but also encourage everyone to consider sharing your views in the public comment file, which Acting Chair Lee recently opened on these topics.[4]

Finally, my door is open to anyone who wants to discuss these matters directly with me.