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SEC Commissioner Peirce Makes the Case against Mandating ESG Disclosure

In remarks before the Brookings Institution, SEC Commissioner Hester M. Peirce argued that the SEC should not adopt disclosure requirements related to environmental, social and governance ("ESG") issues. Her reasons include:

  1. ESG is ill-suited to the creation of boundaries, because it lacks clear unifying principles.

  2. A significant number of ESG issues are not related to financial materiality, rendering them inappropriate for inclusion in SEC-required disclosures; and those issues that are tied to materiality are already subject to disclosure requirements.

  3. The strongest advocates of mandated ESG disclosures are stakeholders - persons who have a commercial interest in the topic - not investors. Expansion of the SEC's disclosure framework would place the agency in uncharted territory in which it is no longer looking to investors' interests to guide its actions.

  4. The SEC's fund and adviser rules are value-neutral. There is a lack of consensus as to what is "good" or "bad" ESG, forcing the SEC to make inappropriate judgment calls in order to standardize the terminology for assessing an adviser's or fund's ESG adherence.

  5. ESG models, methodologies and metrics are in flux, so codifying related requirements would require the SEC to make significant judgment calls as to the reliability and accuracy of different methods.

  6. Emotional pleas pervade ESG topics and may lead the SEC to develop rules that are not within its regulatory authority.

  7. ESG issues are political in nature, meaning that SEC ESG rulemaking could force the SEC to deal with controversial issues that would diminish its limited resources, hindering its ability to execute its mission to protect investors and market integrity.

  8. Mandated ESG disclosures could direct capital flow in favor of certain industries in a manner that is antithetical to the SEC's historic approach, which does not tell investors where to invest.

  9. ESG disclosures could potentially lead to future financial instability.

As an alternative to a prescriptive ESG rule, Ms. Peirce recommended that the SEC could (i) provide issuers with updated guidance to help them see how the existing disclosure regime is already inclusive of many ESG topics, (ii) respond to FAQs as to the application of the current disclosure regime and (iii) engage with investment advisers that use ESG strategies and products to ensure that investors are aware of how the adviser's brand defines ESG "in theory and in practice."

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