SEC on ESG?

Is the Securities and Exchange Commission Finally Integrating Sustainability and Governance Factors into Regulation?

By CSRwire Contributing Writer Bill Baue

When do you know that ESG (or factoring environmental, social, and governance issues into investment and corporate decisions) has gone mainstream? One clue is this week's announcement that MSCI (Morgan Stanley Capital International) is acquiring ESG research conglomerate RiskMetrics (which gobbled up ESG pioneers KLD, Innovest, and Institutional Shareholder Services over the past three years). Another is the agenda of last week's meeting of the SEC Investor Advisory Committee (IAC), which included items such as "ESG Disclosure Work Plan" and "Proxy Voting Transparency." So what does this mean?

The fact that an Investor Advisory Committee even exists – one of SEC Commissioner Mary Schapiro's first initiatives, to return to the "Commission's traditional role as the investor's advocate" (in the words of Committee sponsor, SEC Commissioner Luis Aguilar) – is testament to the success of the G part of the ESG equation: the SEC is governing itself more democratically. The Committee acts as the SEC's sounding board, rebounding guidance to the Commissioners on their regulatory agenda. The Committee's 18 members each represent a different constituency – with the AFL-CIO's Damon Silvers representing labor, and ProxyDemocracy Director Mark Latham representing individual investors, for example.

"Of course, the Commission doesn't have to act on anything the Committee recommends," IAC member Adam Kanzer of Domini Social Investments, who represents the ESG community of social investors, told me in an interview this week. But the very existence of the Committee establishes a mechanism for expressing the public mind – so the Commission would need a damn good reason to act against its recommendations.

The ESG equation squares the circle, reuniting the bifurcation the ol' Investor Responsibility Research Center (which got eaten up by Institutional Shareholder Services in 2005 established with its separate "social and environmental" and "governance" departments (no more having to track down either Meg Voorhes or Carol Bowie, as ESG creates a both/and.) Also, the ESG formulation has turned on its head the traditional perception of sustainability issues as time-wasting, extraneous concerns that drain on returns to potentially material risks and opportunities that investment trustees and corporate directors must factor into decision-making.

Kanzer and Stephen Davis of Yale's Millstein Center for Corporate Governance, chair of the Investor as Owner Subcommittee, outlined the workplan on ESG disclosure (according to meeting attendee Peter DeSimone of the Social Investment Forum, the socially responsible investing industry organization):

• In April, Subcommittee members will hold a meeting on the benefits of ESG disclosure to investors from a risk management perspective;


• In May, they will look at accounting standards and triggers for disclosure of contingent liabilities in the United States and other markets;


• In June, they will review reporting standards, including the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI), and look at information collected by the European Commission during its six meetings on ESG disclosure over the past year;


• In the summer, the Subcommittee plans to hold a public hearing on ESG disclosure to coincide with another meeting of the entire SEC.

The SEC Staff Interpretation released last month – the Commission Guidance Regarding Disclosure Related to Climate Change – set precedent on the E part of ESG disclosure. The guidance does not introduce new rules, but rather clarifies existing rules requiring companies to disclose material risks related to climate change, such as projected impacts of new legislation and international treaties capping carbon emissions.

Predictably, the move prompted opposition: House Financial Services Committee Ranking Member Spencer Bachus (R-AL) fired a letter to Chairman Schapiro voicing "very serious concerns" that the move represents the SEC trying to "promote a political agenda through regulation" and "will impose potentially significant compliance costs on issuers with little apparent benefit to investors." The preponderance of evidence and opinion debunking his concerns (think Stern Report and CDP) raises serious questions whether Bachus is promoting a political agenda through obstruction. Similarly, Senator John Barrasso (R-WY) introduced the Maintaining Agency Direction on Financial Fraud (or MADOFF) bill explicitly to "block" mandatory climate risk disclosure.

Bachus and Barrasso may be spitting into the wind. The corporate community generally understands and even encourages climate change regulation to create certainty and level the playing field through initiatives such as Business for Innovative Climate and Energy Policy (BICEP) and the US Climate Action Partnership (USCAP). Even recently-departed USCAP members BP, ConocoPhillips, and Caterpillar "have reiterated their belief that climate change is a real and serious issue, and that greenhouse gas emissions must be reduced," according to SustainAbility Vice President Jeff Erikson, who pointed to a ConocoPhillips press release re-stating support for federal climate change legislation. "The disagreement instead seems to be in the details of which industries will be most disadvantaged under legislation that USCAP supports," Erikson continued, before voicing disappointment at the three companies' decisions to leave USCAP.

Finally, the Investor Advisory Committee returned to the question of democracy in the wake of the recent Citizens United v. Federal Election Commission case, which considerably expanded corporate political contribution rights. The Investor as Owner Subcommittee voiced its intention to mirror its ESG disclosure proposal by proposing better disclosure or corporate political contribution limits.

The very existence of the Committee expands democratic mechanisms at the SEC, which allows and encourages the submission of public comments to the Committee – about 25 have come in so far for the July 27, 2009, October 5, 2009, and February 22, 2010 meetings. Given the leverage opportunity the IAC represents, maintaining SEC momentum on ESG and corporate democratization may require more of a groundswell to demonstrate widespread public support for these measures – time to “sharpen your pencils.”