Voluntary ESG Disclosures Not Enough for the Feds

Why is the government insisting on costly federal mandates when voluntary industry agreements are making them unnecessary?

Dozens of companies, including some of the best-known consumer brands, recently signed on to a new system of rules for reporting on environmental, social, and governance (ESG) topics. These charter supporters of the “stakeholder capitalism metrics” have pledged to disclose firm-level information on everything from workplace injuries to greenhouse-gas emissions. While issued by the World Economic Forum’s (WEF) International Business Council — which is not usually popular among advocates of free-market economics — these guidelines are at least voluntary. Whatever Davos-style errors are rolled into this “stakeholder” framework, it demonstrates that government regulation over many of these areas is ultimately unnecessary. Will policy-makers take heed?

Before he left the agency at the end of last year, former Securities and Exchange Commission chairman Jay Clayton noted a “growing drumbeat for ESG reporting standards.” Indeed, many industry observers have become frustrated with the proliferation of multiple, inconsistent systems for ESG disclosure and measurement. That is a problem, given that at least $30 trillion in assets are ostensibly being managed according to ESG principles, and the market for data and analysis regarding those investments alone is expected to hit $1 billion this year.

This increasing web of guidelines has put pressure on ESG advocates to coalesce around a single standard. Several have already been vying to become the one ESG framework to rule them all. The United Nations–affiliated Principles for Responsible Investment, the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Prince Charles–sponsored International Integrated Reporting Council are all influential contenders whereas the Climate Disclosure Standards Board and the Michael Bloomberg–chaired Task Force on Climate-related Financial Disclosures provide climate change–specific guidelines.

It remains to be seen whether the WEF’s new system will bring balance to the force, but having some big names on board — including Bank of America, Fidelity, Nestlé, PayPal, Unilever, and the “big four” accounting companies Deloitte, Ernst & Young, KPMG, and PwC — gives it a major leg up.

But will these other organizations agree to relinquish their own claims to the ESG crown? In the introduction to the report announcing its new metrics, the WEF’s International Business Council cites the statement issued last year by the other major standard-setters “detailing how their work and the IBC’s project are fundamentally complementary and could form the natural building blocks of a single, coherent, global ESG reporting system.” It also includes a quote from former Bank of England head Mark Carney, encouraging “governments, regulators, the official accounting community and voluntary standard setters to work with the IBC.” (Carney has since become a vice chairman at Brookfield Asset Management and head of the firm’s ESG and impact fund investing. He also holds advisory roles for both the U.K. and U.N. relating to the question of climate change and finance.)

Read the full article at National Review.