Can ESG metrics ever converge globally? A view from the U.S.

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@ Bence Balla Schottner

U.S. Securities and Exchange Commissioner Hester M. Peirce issued a public statement on the SEC website on 14 April, 2021 with reference to global ESG metrics. Read the commissioner’s own views which do not necessarily represent those of the U.S. Securities and Exchange Commission or fellow commissioners.    

Rethinking Global ESG Metrics

Hester M. Peirce: “The challenge we face in addressing the ever-increasing number of issues underlying E, S, and G is daunting. The task before us is to find a way to bring about lasting, positive change to our countries on a range of issues without sacrificing in the process the very means by which so many lives have been enriched and bettered. Accordingly, a shared desire to address these and other societal problems should compel us to rethink our prescriptive approach to ESG and instead find ways to encourage our most precious resource—our people—to devise solutions to the climate-related and other challenges our societies face.”

The following relates to the debate about IFRS standards vs. standards promoted by the EU Commission.  

The European approach vs. IFRS

Hester M. Peirce: “In the United States, the idea of enlisting the securities laws to achieve ESG objectives is gaining traction among activists and policy elites with a particular emphasis on requiring disclosure of specific ESG metrics. Some are urging us to closely align our rules with our European friends who long have been working on devising a comprehensive set of ESG disclosure metrics. Others would like to see us rely on standards developed and governed by an international body, such as the work being contemplated by the International Financial Reporting Standards Foundation. Indeed, there is mounting pressure to embrace a single global set of metrics, which would facilitate international capital flows and issuers’ reporting obligations.”

An important aspect is also how investors will use ESG metrics and what influence these metrics and datapoints will have on investor behaviour and investment strategy.

Will common disclosure metrics impact asset allocations and creative thinking of investors?

Hester M. Peirce: “At first glance, everything sounds good—common metrics demonstrating a joint commitment to a better, cleaner, well governed society. Common disclosure metrics, however, will drive and homogenize capital allocation decisions. A single set of metrics will constrain decision making and impede creative thinking.”

When comparing financial data concepts with non-financial ESG data important differences have to be considered. The commissioner highlights the challenges in her statement. 

Non-financial data vs. financial accounting data

Hester M. Peirce: “Unlike financial accounting, which lends itself to a common set of comparable metrics, ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries.”

The following statement highlights the wider context and raises far-reaching governance issues. 

Centrally determined vs. people-centered approach to metrics

Hester M. Peirce: “The result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services.”

The commissioner also directly addresses the key questions on “materiality”.  

Financial materiality vs. double materiality

Hester M. Peirce: “Hampering the ability of the markets to collect, process, disseminate, and respond to price signals by boxing them in with preset, government-articulated metrics will stifle the people’s innovation that otherwise would address the many challenges of our age. Moreover, converging standards would be antithetical to our existing disclosure framework, which is rooted in investor-oriented financial materiality and principles-based requirements to accommodate the wide variety of issuers.

The European concept of “double materiality” has no analogue in our regulatory scheme and the addition of specific ESG metrics, responsive to the wide-ranging interests of a broad set of “stakeholders,” would mark a departure from these fundamental aspects of our disclosure framework.”

The statement closes with a warning that a change in disclosure regime could have important implications for shareholders.

Investor-focused vs. stakeholder-focused approach

Hester M. Peirce: “The strength of our capital markets can be traced in part to our investor-focused disclosure rules and I worry about the implications a stakeholder-focused disclosure regime would have. Such a regime would likely expand the jurisdictional reach of the Commission, impose new costs on public companies, decrease the attractiveness of our capital markets, distort the allocation of capital, and undermine the role of shareholders in corporate governance.

Let us rethink the path we are taking before it is too late.”

Refer to Public Statement

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