The Wide World of ESG

Wide World of ESGRemember the Wide World of Sports?

Spanning the globe to bring you the constant variety of sport… the thrill of victory… and the agony of defeat… the human drama of athletic competition.

I loved it. You never knew exactly which sport you’d be watching when you tuned in, but you knew you’d be in for drama. Lately, I’ve begun to think about the term “ESG” in the same way. You never know exactly which concept you’re discussing, but you know there will be drama.

“ESG” stands for “environmental, social, and governance,” and the term is impossible to avoid these days when discussing investing, public company disclosure, and corporate governance. ESG travels with other catchphrases with which you may be familiar—”sustainability” and “corporate social responsibility,” to name a few—but ESG is the umbrella term that many use to talk about a wide range of concepts, often without being at all specific.

And that’s where the drama comes in. ESG is a shorthand for a host of causes, including environmentalism, workforce diversity, and pay equity. Many of these causes are themselves the subject of heated policy debates. Discussing ESG often intertwines questions of financial disclosure, corporate purpose, and financial risk with the debates about the underlying policies. To some that argue that the business world must lead the charge on policy change, that’s the point. But, by and large, muddling policy discussions with various securities and corporate law concepts glosses over the different roles played by market participants, corporations, and government entities. Such muddling also makes it all too easy to accuse anyone who expresses opposition to mandatory ESG disclosures or a skepticism about the financial benefits of an ESG-focused portfolio of also opposing all action on the underlying policy concerns. To avoid the obvious agonies (of defeat or otherwise), at a minimum, discussions about ESG disclosure and governance concepts need to be separated from discussions about underlying policy.

While ESG may be a buzzword, it is not a fringe concept. ESG investing, already on the rise with U.S. investors, has grown sharply during 2020. The number of investments marketed with ESG in mind, including passive investment vehicles like mutual funds, continues to expand. More than 600 ESG frameworks are in use today, and the industry collecting, analyzing, and sharing ESG data is thriving. Despite its growth, there is little consensus to be found about ESG, including what it means to be an ESG investment, what data or criteria are important to judge a company’s ESG bona fides, and even whether E, S, and G should be joined together this way.

The SEC has been sharply, and publicly, divided about the need for ESG-related regulatory intervention in the marketplace. Because these issues are so complex, the Commissioners have often publicly engaged with the broad topic in only limited ways. But outgoing Chairman Clayton and Commissioners Peirce and Roisman have been skeptical of the need for new regulation relating to ESG, while Commissioners Lee and Crenshaw have urged action. A Biden-administration SEC is expected to take up this topic with vigor.

To further the conversation, I’ll be writing a series of essays on the wide world of ESG, separating ESG from the underlying policy questions and breaking down tough concepts like applying materiality to non-financial reporting, mandatory versus voluntary disclosures, fiduciary responsibilities in ESG investing, and shareholder participation. Separately analyzing the many parts of ESG is vital to analyzing their regulatory significance and discussing the impact of potential regulation (or refutation of such regulation) on investors and other market participants. These essays will propose solutions, where warranted, aimed at improving the function of our capital markets and meeting investor demand for ESG. Join me in spanning the Wide World of ESG.

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