Two SEC Commissioners Oppose Adding ESG Sustainability Standard Setting to FAF Agenda

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioners Hester M. Peirce and Mark T. Uyeda sharply criticized the Financial Accounting Foundation ("FAF") for introducing in its draft strategic plan the goal of contributing to the development of future sustainability standards.

In a letter to the FAF, the Commissioners argued that by introducing this goal, "the FAF runs the risk of degrading the independence and effectiveness that are the hallmarks of the FAF's two standard-setting boards, the Financial Accounting Standards Board ("FASB") and the Governmental Accounting Standards Board ("GASB")." They argued that such a goal would (i) be contrary to the FAF's mission "to establish and improve financial accounting and reporting standards" and (ii) undermine the integrity of current financial accounting standards.

Ms. Peirce and Mr. Uyeda asserted that imposing accounting standards specific to sustainability would provide investors with low-quality and potentially misleading financial reports. They asserted that current sustainability standards are "imprecise, inconsistent and unfocused" and are "built on guesswork and data gaps," and that, for many investors, sustainability information does not factor into investment decisions. They stated: "[A]bsent a clear audience or objective, sustainability standards are unbounded in scope and subject matter."

Further, the Commissioners warned that exploring sustainability standards may expose the FAF to undue political influence, which would "tarnish the integrity the organization has maintained over the last half-century." They said that the FAF's ability to remain politically neutral is paramount to its trustworthiness among investors, and that becoming involved in a politically charged topic would erode that trust.

Commentary

Sometimes it seems that the U.S. financial regulators seem eager to abandon their day jobs to focus on ESG. It is doubtful that the FAF will take the Commissioners' advice and steer clear of ESG standard setting. This is too bad.

Even if the SEC chooses to adopt ESG accounting standards, any such rule making will be tied up in court on APA challenges. Assuming the standards survive legal challenge, a change in administration would mean that the rules will likely be dropped because there is simply no political consensus of support. Not to mention, that compliance will likely be so expensive that a new administration will do whatever is required to rescind the rules. In that scenario, the FAF will have wasted a good deal of resources on a project that will dead end. And if that prediction is wrong, and the rules are successfully adopted and implemented, the FAF will have taken on a task as to which it has no natural expertise. There is nothing in the preparation to become an accountant that would give one expertise in sustainability issues.

Email me about this

Premium Content

Available only to Premium subscribers.

 

Tags