Don’t Force a One-size-fits-all Framework On Social Investors

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Interest in environmental, social, and governance-themed, or ESG, investing has seen significant growth in recent years, but it has been matched by persistent complaints from some market participants. Chief among these is a lack of clear definitions for what constitutes a “socially responsible,” “green,” or “sustainable” investment product. While a desire for systemic clarity is understandable, investors and analysts need to acknowledge that many aspects of ESG investing simply cannot be forced into a one-size-fits-all framework. Accepting that reality is the smart and reasonable path forward, both for investors and for government officials.

Securities and Exchange Commission (SEC) Chairman Gary Gensler, in remarks this July before the United Nations-affiliated Principles for Responsible Investment, said, “Investors are looking for consistent, comparable, and decision-useful disclosures.” He likened the desired data to the scores given to Olympic athletes. We can compare the performance of a sprinter from another continent or from a century ago to one competing today, because we know they both ran the same distance. Thus, we should also be able to compare how different companies manage ESG-related risks if they are all required to disclose the same types of data.

Chairman Gensler’s Olympics analogy is useful, though it may not support his position in the way he imagines. The International Olympic Committee (IOC) only has jurisdiction over athletes who choose to compete under its auspices and to follow its rules. Anyone is free to host a figure skating tournament with scoring standards different from the IOC’s. What Gensler is suggesting for public companies would be more like a cartel with a single standard-setter, the equivalent of the IOC taking control of every other sports league and federation, including the NBA, the NCAA, FIFA, and others. Many vibrant and innovative nonprofit organizations in the ESG space issue their own guidelines and recommendations — an SEC takeover would all but put them out of business.

Read the full article at RealClear Policy.