Will America lead or fall behind on responsible investing?
The United States is a global leader by so many measures. The U.S. Women’s National Soccer Team did just win the World Cup, after all. Yet, when it comes to responsible investing, a critical tool for embedding social and climate awareness in the way we do business, the U.S. is lagging behind.
Investors and regulators around the world, including the European Union this past March, now recognize that integrating environmental, social and governance (ESG) factors has become a necessary part of investing. More than 20 countries and seven stock exchanges around the world have enacted rules requiring companies to disclose ESG information.
When a company integrates ESG considerations into the management of their business, it often coincides with reduced volatility and better performance over time – it’s no wonder regulators want to encourage this outcome. A meta‐study by Deutsche Asset & Wealth Management and the University of Hamburg found “a positive correlation between ESG and financial performance,” where ESG strategies outperformed 62 percent of the time, 30 percent had neutral performance and only 8 percent under performed. Further, when investors can access comparable and consistent data, new opportunities emerge for better investment decisions.
Yet despite this growing global consensus, the U.S. Securities and Exchange Commission (SEC) has not implemented disclosure requirements for material ESG factors. Moreover, the SEC is considering regulatory changes that would curtail the rights of shareholders to communicate effectively with the companies they invest in, including to weigh in on ESG considerations. By increasing ownership requirements for submitting shareholder proposals and limiting the role of proxy advisory firms, the proposals currently under consideration by the SEC would threaten the rights of investors to stay actively engaged on issues that affect a company’s reputation, profitability and long-term financial stability.
Institutional investors have banded together to send a clear message to the SEC. Last October, a coalition with more than $5 trillion in assets under management, along with academic experts, submitted a petition to the SEC urging the Commission to develop a comprehensive rulemaking framework for ESG disclosure requirements. As the world’s leading proponent of responsible investing – representing shareholders with more than $86 trillion in assets under management – the Principles for Responsible Investment (PRI) supported the petition. Nine months later, we have not seen an adequate response from the SEC.
In light of the SEC’s failure to act, Congress must take the lead. The U.S. House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets took an important first step by hosting a hearing titled “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures.” The hearing began an important conversation about how U.S. companies can, and should, disclose the impact of their investments on our planet, on our communities, and on our economic security. Next up, Congress must take a good, hard look at legislation that will move this ball down the field, including the ESG Disclosure Simplification Act, the Shareholder Protection Act, the Corporate Human Rights Risk Assessment, Prevention, and Mitigation Act, and the Climate Risk Disclosure Act – all introduced this month.
The U.S. market is ripe for reform. Our organization represents more than 450 signatory investors in the United States alone, managing over $42 trillion – all of whom agree to both be active owners and incorporate ESG issues into ownership policies and practices, and to seek appropriate disclosure on ESG issues by the entities in which they invest.
The stated mission of the SEC is to “to protect investors,” but their limited movement on responsible investment has done just the opposite. Without explicitly requiring ESG disclosures, the SEC leaves investors with a blind spot that competitors in foreign markets can, and will, seize. Prioritizing disclosure requirements to encourage the incorporation of ESG considerations is a critical next step – one that Congress and the SEC must take if America has any chance at leading on responsible investing.
Fiona Reynolds is CEO of the Principles for Responsible Investment.