Directors struggling to come to grips with the burgeoning ESG-industrial complex should take a few minutes this week to read SEC Commissioner Hester Peirce’s provocative recent speech on the issue to the American Enterprise Institute.
Peirce, the keynote speaker at our upcoming West Coast Board Committee Peer Exchange in November, has been making waves with a series of sharp, contrarian—and entertaining as hell—speeches. Her latest, which has so far received little coverage, is perhaps her most important for public-company directors. It really is worth reading in full (about 10 minutes).
In the June 18 speech, she pokes at increasingly accepted wisdom among companies and boards, that becoming more ESG-focused is absolutely essential to business success, and that failure to do—or even just not correctly proving that you’ve done so—risks being branded with the kind of scarlet letter familiar to anyone who’s read Nathaniel Hawthorne.
The problem, argues Peirce, is the same thing Hawthorne warned about: judgments based on “incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people.”
“In our purportedly enlightened era,” she writes, “we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.”
It’s a sentiment you often hear in private when talking among directors, but seldom in public. As every director knows, the new focus by investment titans like BlackRock and State Street on ESG topics by public companies has given rise to an entire ecosystem of advisors, from producers of ESG ratings to proxy advisors to investment advisors, non-investor activists and on and on. Yet, by its very nature, ESG — especially the E and the S — are painfully difficult to quantify, let alone grade. This, she says, creates a perverse system that thrives because of—not despite—its ambiguity.
“The business is a good one because the nature of ESG is so amorphous and the demand for metrics is so strong,” she says. “ESG is broad enough to mean just about anything to anyone.”
Compliance does not come without a cost. Of course, there is the increasing interest among investment companies—big and small—in basing investment decisions, at least in part, on ESG factors. But there is also the sheer cost of trying to keep up with all of the requests for information.
In her speech, Peirce recounts the testimony at the SEC of a senior counsel for an insurance firm who received 55 survey and data verification requests from ESG rating organizations in just the last year. The company told the SEC that it took about 30 employees and nearly 45 work days to respond to just one of the surveys.
“As with the scarlet A, the ESG letters oversimplify complicated facts,” writes Peirce, “and thus may send companies scrambling to take actions that neither achieve the broader social goals of ESG proponents, nor serve their shareholders well.”
