Problems with ESG
The new chairman of the Securities and Exchange Commission (SEC), Gary Gensler, wants the SEC to become America’s climate regulator by mandating environmental, social, and governance (ESG) disclosures for both public and private companies. In my view, however, the SEC is drifting into an area that is far afield of its statutory mission. To be clear, I have no problem if a company wishes to provide climate or other ESG information to investors. Further, if such ESG factors are material to an investment decision, the company would already be disclosing it in their SEC filings. No regulatory mandate is necessary.
ESG is a framework that allows investors to consider environmental, social, and governance factors alongside financial factors in the investment decision-making process. The SEC under Chair Gary Gensler is now attempting to make ESG metrics a required part of corporate disclosures, despite many ESG factors not being material to shareholder decisions. Even if something is ethically or socially significant to investors, if it is financially insignificant, it cannot be material. A company’s fiduciary responsibility to its shareholders cannot be secondary to the various, changing political and social views of unelected government officials at the SEC.
However, the problems with ESG go beyond the lack of nexus to materiality, especially when investors are harmed. The “ESG industrial complex” being pushed by Wall Street often misleads investors by labeling and advertising investment funds as “green” while charging higher fees, yet making no discernible, sustainable changes to the funds’ portfolio allocation. Can a self-proclaimed ESG fund that invests in oil and gas companies really be “sustainable”?
Earlier this year, House Democrats attempted to pass a partisan bill that would mandate public companies annually disclose ESG metrics. When I introduced an amendment to the bill to require the SEC to carefully identify and describe inconsistencies in the methodologies related to ESG metrics before requiring public companies to disclose these metrics, Democrats voted it down alongside other commonsense changes. I also led a letter to Chair Gensler with over 20 House Republicans questioning whether climate risk meets the materiality standard and how the SEC should steer clear from dictating environmental policy, as well as a letter to Chair Gensler questioning the Commission’s statutory authority to mandate ESG disclosures for privately-held businesses.
Republicans will continue to fight attempts to mandate ill-conceived approaches to ESG and climate-risk disclosures while encouraging a continuation of the materiality standard, which has served investors well for decades. The SEC should stop politicizing the Commission to advance a liberal social agenda and instead focus on its statutory mission to maintain fair, orderly, and efficient markets, and to facilitate capital formation.
–Congressman French Hill, member of the House Financial Services Committee
Congressman French Hill represents the second district of Arkansas and is a senior Republican on the House Financial Services Committee.
