Interview

“Reason Will Win Out”

Allison Herren Lee, former SEC Acting Chair and Commissioner, says regulators must ensure consistent, comparable and reliable climate-related disclosures despite rising anti-ESG backlash.

Financial markets are preparing for the US Securities and Exchange Commission’s (SEC) long-awaited rule on climate disclosure, but demand for companies to report on climate-related information, such as greenhouse gas (GHG) emissions, has been growing increasingly for over a decade. In fact, 86% of S&P 500 companies already regularly issue ESG-related reports, representing a 35% increase from 2010 levels, a recent report found.  

According to Allison Herren Lee, former SEC Acting Chair and Commissioner, and newly appointed Sustainability Advisory Board member at climate management and accounting platform Persefoni, investors have taken it upon themselves to amass climate-related data from portfolio companies as they have long-viewed it as financially material and necessary to inform their investment decisions.  

In 2019, Lee said it became evident, however, that this approach had reached its “maximum utility”, and it was now the ideal time for regulators to step in. 

“While regulators initially were not in a position to dictate what investors needed in terms of climate-related information, once the groundwork was established, regulators are now well-positioned to provide consistency, comparability, and reliability, something private ordering alone cannot achieve,” she tells ESG Investor. 

Investors have spoken 

Despite a deliberate and consultative approach to its development, the much-anticipated SEC climate disclosure rule has suffered many setbacks. A technology failure last year forced the regulator to reopen its public consultation process, with legal challenges on the grounds of regulatory overreach to the upcoming rule regarded as inevitable by legal experts. 

The rule is now expected to be finalised later this year, though the proposal has received significant criticism, chief among them that Scope 3 requirements – which involve reporting of carbon emissions of customers and suppliers – present liability concerns and data collection and measurement challenges for companies. The compliance cost of the proposed rules on climate disclosure are another point of contention for companies, with the SEC estimating that the cost to comply could be between US$3.9 billion to US$10.2 billion. 

Such criticisms, fuelled by a rising anti-ESG movement in the US, have increased the prospect of legal challenges and possible dilution of the SEC’s proposal. However, a survey by PwC and reporting software provider Workiva found that 70% of business leaders refuse to take a wait-and-see approach and proceeding as if the rule already in force.  

“Decisions in the capital markets are being made related to ESG, and it is our belief that market participants and other stakeholders are entitled to the same quality of information as they expect from financial related disclosures,” said Kevin O’Connell, Trust Solutions ESG Leader at PwC. “Many ESG issues can be material to a company’s core strategy and long-term value creation. Regardless of when the SEC rules are finalised, investors and stakeholders have made clear: this is important.” 

Lee admits that the rising anti-ESG sentiment in the US is “unfortunate” but any concerns she may have are mitigated by the fact that investors and the vast majority of companies are resolute on the value of climate-related disclosures.  

The battle over ESG rages on, however, with a rising number of public pension funds being embroiled in efforts by Republican politicians to rein in so-called ‘woke’ investing by banning states and municipalities from working with asset managers that have ESG investment policies against oil and gas companies, and the firearms industry.  

Last year, the Kentucky County Employees’ Retirement System’s board – which oversees US7.9 billion in AuM – informed Kentucky State Treasurer Allison Ball and Attorney General Daniel Cameron that it would not divest, as instructed, from asset managers, including BlackRock, as it would violate its fiduciary duty.  

Republicans have also introduced bills aimed at prohibiting ESG investing by state retirement systems in Indiana, Texas and Kansas, leading to outcry from sustainability-focused shareholders, and environmental advocacy groups.  

Research by Wharton Business School at the University of Pennsylvania showed that anti-‘woke’ ESG policies are costing US taxpayers between US$300 million to US$532 million by prohibiting municipalities from contracting banks that have ESG policies in place.  

“At the end of the day, reason will win out,” says Lee. “Wall Street is not likely to sit back and allow someone to require them to ignore the economics that are right in front of their face.

“There could be some unfortunate backtracking in the short term, but we are seeing the result of what happens when an immovable object is met by an unstoppable force.” 

Wider ESG initiatives 

As Acting Chair and then Commissioner, Lee was deeply involved in the development of SEC’s climate disclosure rule, but it was far from her only area of lasting influence. During her tenure, she established an ESG Taskforce in the SEC’s Division of Enforcement and launched an investor education programme related to ESG investment risks. 

The ESG Task Force was established due to the abundance of ESG-related data and information being released by public companies, with it becoming evident to Lee that there was a lack of discipline and comparability regarding the information companies could put out voluntarily. 

“Companies have the freedom to disclose only the metrics they choose and switch to different ones whenever they like with little oversight ” says Lee. “However, it was clear to me that although there may not be specific ESG regulations in place, companies still had to comply with federal securities laws, particularly the rule against making material misstatements or providing materially inaccurate information.”

Therefore, she felt it vital to impose some form of discipline on the existing disclosures available, leading to the creation of the ESG Taskforce. 

Lee was also responsible for setting up several other ESG initiatives during her time working at the SEC. Among these initiatives, investor education was crucial due to the rapid growth of interest in ESG investment. 

Global baseline 

The SEC’s climate disclosure rule is the next step in a global shift in financial regulation requiring issuers to provide standardised climate-related information to investors and other stakeholders. 

Bodies including the International Organization of Securities Commissions (IOSCO), the Taskforce on Climate-related Financial Disclosure (TCFD) and the International Sustainability Standards Board (ISSB) have been coordinating to establish a baseline of recommendations on climate-related disclosures. These established principles and processes have been incorporated into the SEC’s upcoming rule. 

The EU’s Corporate Sustainability Reporting Directive will come into force in January 2024, comprised of reporting standards that are more comprehensive to that of the SEC’s proposed rule due to it applying a double materiality lens, requiring companies to report on how their business is impacted by sustainability issues from an both an ‘outside-in’ and ‘inside-out’ perspective.  

Further, CSRD will apply to foreign companies too, with research by data provider Refinitiv identifying that around 10,000 companies outside the bloc, including US firms, that will be subject to its incoming rules.  

Lee says she is a fan of CSRD and supports the work being carried out by the ISSB, noting that the best-case scenario is to have a global baseline and allow different jurisdictions to build climate-related disclosure rules from that foundation.  

“It is the nature of global markets for different jurisdictions to have varying needs, resulting in divergence,” she says, adding that this does not mean having a “buffet of options”, however.
 
“There should be a global baseline, and each jurisdiction should tailor it to their own geopolitical needs. There are a lot of unique characteristics among the various jurisdictions, even in the G7,” Lee adds. 

“It makes sense that there will be differences, and I’m supportive of international dialogue and cooperation towards agreeing on certain baseline approaches – it is important to work together to support interoperability for global businesses.” 

In her new role at Persefoni, Lee aims to advance climate-related disclosure and promote greater transparency and accountability in GHG emissions data. 

She stresses the need for businesses to begin “gearing up” to produce climate-related data and not just in preparation for the upcoming SEC rule, but because companies need it for their own internal decision making.  

“It’s data that management needs,” she says, noting that many companies already understand value of this data, but others may be surprised at its broader value to their strategy.

“Data is king, and that’s what we need to get some uniformity around.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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