Economy and Society: ESG pioneer fires back at SEC Commissioner

ESG Developments This Week

In Washington, D.C., and around the world

ESG pioneer fires back at SEC Commissioner

As noted last week in Economy and Society, on July 20, SEC Commissioner Hester Peirce “delivered an address at the Brookings Institution in which she again made the case that the SEC’s current leadership is overstepping both its regulatory mandate and the bounds of what is objectively knowable about corporations and their impact on aggregate measures of environmental, social, and corporate governance (ESG) well-being.”

In response to Commissioner Peirce’s address, Robert Eccles, a former professor at Harvard Business School and an ESG investing pioneer, offered a rebuttal, of sorts at Eccles, who was the Founding Chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC), and who has thus been pressuring the SEC on this issue over three presidencies, is frustrated with the Commission’s pace on reform:

“One week ago today on July 20, 2021 Trump appointee SEC Commissioner Hester M. Peirce (R) gave a 4,725 word speech to the Brookings Institution titillatingly titled “Chocolate-Covered Cicadas.” The purpose of this cute title eludes me because I never figured out where the chocolate-covered comes from. The only time it’s mentioned again is the snide closing line of her speech in which she says that in 2038 “perhaps even the chocolate-covered cicadas will be net-zero carbon.”

In her speech Peirce notes a request from her fellow Commissioner Allison Herren Lee for comments on climate change. Yes, Commissioner Peirce, climate change is real. Peirce thought it helpful to point out that Lee’s request came on the Ides of March. In her typical soft dig sleight of hand, Peirce points out that “it was not a Commission request.” Nor did the SEC request Peirce to give her speech and here she gives the standard disclaimer “that the views I represent are my own views and not necessarily those of the SEC or my fellow Commissioners.” For this we can count our blessings.

Once again, the Commissioner camouflages her hard-right ideological views by couching her remarks in the pretext of sparking “a textured conversation about the complexities and consequences of a potential ESG rulemaking.” Perhaps in hope of brandishing some green credentials, Peirce plays the naturalist by beginning with an endearing tutorial on the 17-year Cicadian cycle which she somewhat incoherently links to ESG rulemaking.

The construction of her speech nicely maintains the charade of wanting to have a conversation. She organizes it in terms of 10 “theses” (her own rendition of a slimmed down Diet of Worms) supported by 63 (!) footnotes. In this piece I will respond to each of her theses.”

Meanwhile in London…

The International Organization of Securities Commissions, a global organization of securities and futures regulatorsincluding, for example, the Securities and Exchange Commission released a paper asking member organizations and states to begin the process of consolidating ESG ratings services and regulating the uniformity of those ratings.

“ESG raters and data providers are largely unregulated, lack transparency in their methods, offer uneven coverage and harbour potential conflicts of interest, said the International Organization of Securities Commissions (IOSCO)….

Asset managers running ESG focused funds increasingly rely on about 160 raters globally to help pick stocks and bonds, raising investor protection questions, IOSCO said. Users, however, generally do not conduct any formal verification of the ratings, calling the process a “black box”.

“Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing,” said Ashley Alder, who chairs IOSCO and heads Hong Kong’s securities watchdog.

IOSCO’s consultation paper recommends that regulators consider formally regulating the sector, echoing similar moves with credit rating agencies (CRAs) in the aftermath of the global financial crisis over a decade ago when similar concerns were aired.

Regulators could encourage industry to develop and follow codes of conduct, the watchdog said.”

…And in Brussels

In January, the European Commission introduced new climate-investing benchmarks, which are beginning to draw interest from asset managers who are interested in standardized green investments and are leery of greenwashing. Bloomberg reports that only a small fraction of ESG funds are benchmark-aligned at present, but the amount is growing and expected to continue to grow:

“ESG asset managers are accelerating their use of new climate-investing benchmarks created by European authorities, in a development that’s set to make it harder to get away with greenwashing.

While only about $1.2 billion is now tied to gauges that meet European Commission requirements — a tiny fraction of the $35 trillion of ESG assets worldwide — inflows have more than doubled since January, according to the European Securities and Markets Authority.

That suggests investors are looking for some guardrails as they navigate a market rife with anxiety about greenwashing, which is the term that’s been given to exaggerated, false or deceptive claims about a product’s fidelity to climate goals, such as those set in the landmark 2015 Paris agreement. EVestment, a unit of Nasdaq, estimates that there are more than 890 ESG dedicated strategies and another 7,400-plus that integrate ESG into the investment process.

Before the creation of the new benchmarks “you could have smacked that label on a product and gone, ‘Paris Aligned,’ and there could be anything going on in that index,” said Jas Duhra, the EMEA head of environmental, social and governance indexes at S&P Global, which makes and markets such gauges. Now, asset managers making ESG claims “can’t just have an index that’s formed of IT companies and media companies.””

Additionally, Alicia Carspeck, the head of research at Fabric RQ, made the case that the European Commission’s new ESG regulations will, in her view, “transform the global standard for risk management.”

“The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March, is designed to drive capital toward sustainably-oriented investments. It is widely considered the broadest regulatory action in sustainable finance to date. And for U.S. firms trying to keep up with the blistering pace of ESG-related transformations within the financial sector, the SFDR could offer some clarity.

The SFDR was initiated by the European Commission as part of a broad EU action plan, announced in 2018, to encourage sustainable investing throughout the EU financial system and to put ESG issues on-par with traditional financial risk indicators. It is broad in its scope covering nearly all asset managers, investment product providers, and financial advisors that operate within the EU. The first phase of reporting standards is already in effect and increasingly detailed reporting obligations will phase in over the coming months and years….

Under the SFDR, all EU asset managers (whether or not they are focused on sustainability) are now asked to publicly disclose: their approach to incorporating sustainability considerations their investment decisions; any “adverse impacts” investments may have on environmental or social factors; and, any sustainability risks that may impact investment performance….

Financial advisors will now be required to counsel clients on the sustainability implications of their investments — including the potential impact (whether negative or positive) on the financial performance of their investments.

The SFDR will act as a mandate for participants in financial markets to “do no harm” to society and the environment while also safeguarding investors from exposure to undue risk stemming from poor ESG positioning of their investments. The regulations are written to make sustainability considerations a routine addition to existing financial disclosure and risk-management requirements.”

While the SEC continues its internaland externaldiscussions about materiality, the European Commission is moving ahead with reforms that preemptively alter those standards by imposing the SFDR’s requirements even on “Non-EU managers and advisors that market financial products into the EU or provide advice to EU firms.” These include large American asset management firms like BlackRock, for example.

On Wall Street and in the private sector

Former ESG investment professional critical of industry

Joining former BlackRock head of Sustainable Investing Tariq Fancy and a handful of other former ESG insiders, Desiree Fixler, the now-former head of sustainability for DWS (Deutsche Bank’s asset management arm) has called out her firm for alleged ESG duplicity. While Fixler has not carried out a public campaign similar to Fancy’s, according to the Wall Street Journal, she has nevertheless been critical of the way DWS has performed on ESG, especially by comparison to the way it markets its products. DWS implied, in return, that the problem was Fixler’s, not the firm’s:

“Deutsche Bank AG’s DB -3.02% asset management arm, DWS Group, DWS -0.30% tells investors that environmental, social and governance concerns are at the heart of everything it does, and that its ESG standards are above the industry average.

But behind closed doors, it has struggled to define and implement an ESG strategy, at times painting a rosier-than-reality picture to investors, according to its former sustainability chief and internal emails and presentations seen by The Wall Street Journal….

Frankfurt-based DWS said in its 2020 annual report released in March that more than half of its assets under management—€459 billion, equivalent to $540 billion—have run through a process it calls ESG integration. In such a process, companies are graded on ESG criteria, which helps inform fund managers if the investment faces any risks related to these standards.

According to an internal assessment of the company’s ESG capabilities a month earlier, “only a small fraction of the investment platform applies ESG integration,” adding there is no quantifiable or verifiable ESG-integration for key asset classes at DWS….

The same month, Desiree Fixler, DWS’s sustainability chief, made a presentation to the executive board saying the firm had no clear ambition or strategy, lacked policies on coal and other controversial topics and that ESG teams were seen as specialists rather than being an integral part of the decision-making, according to the presentation, which was reviewed by the Journal.

That contrasted with what DWS told investors in its annual report: “As a firm, we have placed ESG at the heart of everything that we do,” it said….

Ms. Fixler was fired on March 11, one day before the annual report was released. Ms. Fixler said she believes DWS misrepresented its ESG capabilities. She said revisions and verbal objections she had made to the annual report before publication, including how many assets were under ESG integration, were never included. She said she was fired because she was too vocal about problems and has filed an unfair dismissal case against DWS in a labor court in Germany.

“As chief sustainability officer, as a proponent of ESG, how could I not speak up on wrongdoing,” she said in a statement sent to the Journal. “Posturing with big statements on climate action and inclusion without the goods to back it up is really quite harmful as it prevents money and action from flowing to the right place.”

 DWS, which is majority owned by Deutsche Bank but maintains its own stock listing, said in a statement that it has always been transparent to investors and clients, and it stands by its annual report, which was audited by KPMG.

It said that standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition. It said the sustainability office led by Ms. Fixler didn’t gain the expected traction on creating or showing an action plan.”


Does ESG differentiate companies?

A recent analysis conducted jointly by the Wall Street Journal and the Drucker Institute indicates that corporations are generally unable to differentiate themselves from other companies through their ESG efforts. This, in turn, according to analysis, suggests that whatever their interest in or dedication to ESG practices, corporations seeking greater investor interest are likely to be disappointed by the results their ESG efforts yield:

“Companies have a lot of good reasons to pay close attention to environmental, social and governance factors: attracting talented employees who want to work at a place that is making a positive impact on the world; responding to regulators who are demanding more ESG-related transparency; and pleasing major investors who are pushing them to be sustainable for the long haul.

But there’s at least one thing that being ESG-minded may not do: help a corporation stand out from the crowd as much as other actions might.

That’s the big takeaway from our latest analysis of the Management Top 250….

In all, we evaluated 886 large, publicly traded companies last year through the lens of 33 indicators that fall into five categories: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.

In our most recent research, we wanted to see where companies were setting themselves apart, thereby shedding light on the richest opportunities for firms to build a distinct reputation or brand identity.

The runaway winner was innovation, where the spread between the highest-scoring company in our universe ( Inc. AMZN -7.56% at 135.9) and the lowest ( Apartment Investment & Management Co. AIV 0.87% at 36.5) is a whopping 99.4 points….

[T]the configuration within social responsibility is striking. It has by far the narrowest span—50 points—between the highest-scoring company ( Microsoft Corp. MSFT -0.55% at 78.9) and the lowest-scoring firm ( Seaboard Corp. SEB -0.73% at 28.9). The differential is 67.3 points in customer satisfaction, 73.4 points in employee engagement and development and 76.3 points in financial strength.”