SEC's Peirce Talks ESG And Agency's Future Under New Chair

By Al Barbarino
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Law360 (April 30, 2021, 5:09 PM EDT) -- Recent initiatives from the U.S. Securities and Exchange Commission could bring wholesale changes to the way the agency polices environmental, social and governance disclosure issues, but the existing framework doesn't need any fixing if you ask Commissioner Hester Peirce.

Hester Peirce

In part one of this two-part interview series, Peirce told Law360 that the SEC's existing principles-based framework already provides an "objective test" to make sure firms are disclosing material risks, warning that recent calls for a more prescriptive approach could prove to be an exercise in regulatory overreach.

Peirce also said she's "not a big fan" of task forces with an enforcement mandate, such as the one launched in March to tackle ESG issues. And she suggested that firms are already following existing disclosure guidance and rules.

Beyond ESG, Peirce offered insights on her interplay with fellow commissioners, how that changed with the coronavirus pandemic, and where she hopes to find common ground with her colleagues and new SEC Chair Gary Gensler moving forward.

This interview has been edited for length and clarity.

Is a new ESG disclosure framework necessary, or are existing guidance and rules enough?

We have a principles-based disclosure framework that is rooted in materiality and intended to be flexible so it can be used by issuers across industries. The materiality standard is derived from U.S. Supreme Court case law, which tells us that information is material if there's a substantial likelihood that a reasonable investor would consider the information important in making a financial decision about the company. That's an objective test that we can look at.

I'm happy to hear from people about calls for specific metrics. But I'd like us to break down and talk about which piece of ESG we're talking about. If we're talking about climate risks, let's talk about that; if we're talking about 10b5-1 plans, let's talk about that. If there are specific metrics that people think need to be disclosed, let's talk about it.

With respect to the 2010 climate guidance, I think that companies have been following it and I don't see a particular need to update it. People should bear in mind that there's going to be difficulty in implementing a prescriptive ESG disclosure framework. It's very different from our typical principles-based approach. So I think people are maybe overpromising what a prescriptive ESG framework could provide. I don't know that we would get comparable, reliable, accurate information.

Why isn't a new disclosure framework a good idea?

There are efforts on the part of a number of third parties to create a framework. The International Financial Reporting Standards Foundation, for instance, is trying to create a sustainability standards board. But I think comparing accounting standards to ESG standards is [a mistake] because accounting standards are much more objective and easily measured.

You see accounting standards change over time, you see disputes within jurisdictions and you see a lack of consistency across jurisdictions. So even with something that is strictly about the numbers, it's difficult to get agreement. And I think people really need to be realistic about what an ESG framework could deliver.

I think a lot of this push is coming from asset managers advertising and selling ESG investment products, which is fine. But I think your job as an asset manager is to tell investors what you're doing and how you're doing it. If you [as an investor] need information that's not material to achieve your goals, then it's your obligation to get that information. It isn't the SEC's obligation to find that information for you.

On the asset management side, it's important to remember that most investors who are investing in mutual funds and exchange-traded products are looking to build their nest egg for retirement, college or to pass down to future generations. While many investors are embracing ESG, asset managers' primary objective is to accumulate and increase the value of their funds. They need to be careful not to insert their own policy preferences into investing other people's assets unless they're very clear those preferences are aligned with their fund's objectives that they have spelled that out, and that investors are very aware of that.

Finally, I worry about using the securities laws to implement policy preferences. Our capital markets are valuable and they've functioned very well to help people live better lives and achieve prosperity. Our goal should be to ensure that more Americans can participate in those capital markets. It shouldn't be to inject political issues into the capital markets.

The SEC launched a new ESG task force headed up by Kelly Gibson, and the agency's examinations unit issued a risk alert on ESG disclosures. Do you see an uptick in enforcement coming in this area?

I think it's hard to know. And that's why Commissioner Elad Roisman and I issued a statement after this flurry of ESG statements came out. I think it's important for people not to be caught up in whatever the trend of the day is, whether it's ESG or something else, but just to keep doing what they're doing and tell their investors what it is they're doing. Then the investors can figure out whether or not they want to invest in that enterprise.

I'm not a big fan of creating task forces in the enforcement context. I think it's better for us just to keep an open mind and to go after violations where we find them. Kelly Gibson is very good at what she does, and she goes where the facts are in terms of pursuing securities violations. But I'm not really sure that we need a specific enforcement task force. Of course, we will always have the ability to go after companies that are not disclosing what they're supposed to be disclosing. So that's not new.

What advice do you have for companies moving forward?

I think it's wise for companies to take a look at the [2010] guidance and make sure they're complying with it. That means adhering to the standard disclosure framework, which is really intended to work over time. If you're disclosing what's material to investors through the eyes of management, you should be fine.

The risk alert is intended to help investment advisers and funds offering ESG products and services. It shows we've looked at some of the firms offering ESG products and here's what we found. Make sure that you're being upfront with people and actually carrying through with the disclosures that you make. So I think, from that perspective, an alert like this can be quite useful.

Do you have any ideas on which way Gary Gensler, the SEC's new chairman, may lean on this?

I have known Chairman Gensler for a long time, and he is knowledgeable about the capital markets and he loves the role that the capital markets play in the country. I'm sure he's meeting with tons of people and hearing lots of different perspectives. And I'm sure that will continue as he settles in. So it's just really too early for me to speculate about the approach that he's going to take in this area. He's got a lot on his plate. In addition, there's still a request for comments out from former acting Chair Allison Herren Lee, and I think we're certainly open to hearing from investors and issuers and from anyone else who's interested.

Could you explain the interplay between the SEC commissioners and chair, and how that has been affected by COVID-19?

We speak frequently. What I love about the commission structure is that it brings together a group of people with very different backgrounds and very different approaches to solving problems, and maybe even different approaches to identifying what the problems are. We all share a love for the capital markets and a real concern for investor protection and market integrity. So I've just found those relationships to be very rich.

COVID has had the same effect on us that it has on other entities. In some sense it's easy, because you can always pick up the phone. But on the other hand, you're not running into each other in the hallway and in the elevators. Some of that natural interaction is eliminated, and that's unfortunate.

It has been a difficult year for a lot of reasons. At the beginning of the COVID crisis we had a lot of volatility in the market. Then at the beginning of this year we had the meme stock events. Chairman Jay Clayton left, then we had acting Chair Roisman, then acting Chair Lee, and now Chairman Gensler, so there's been a lot of change. But we know each other, and we like working together. So despite that change, there's been a continuity because we all are united in our objective.

I think there are obviously going to be areas where we disagree in the coming years, but I think it's really important that we all work together and that we all draw on each other's different perspectives.

Where might you find common ground with Gensler and your colleagues moving forward?

Especially in the wake of COVID and as the economy recovers, I think there will be a lot of emphasis on access to capital for small businesses, not just on the coasts but all over the country and in every community. We can all agree that we want more Americans to become investors and to take advantage of the resources that our capital markets provide as a way to fund their dreams and businesses.

I think we can all agree on the importance of certain things, even though I'm not sure we'll always agree on the approaches. Specifically, we may embark down the road of trying to address a really long-running issue, which is the lack of clarity around finders who help match companies with investors. Can we do something to provide a regulatory framework there? Can we do something to provide a micro-offering exemption, which would be a streamlined exemption for relatively small capital raises?

On crowdfunding, we've made some good changes, but I think we need to do even more. I'd also like us to work on trying to preempt state regulations over secondary trading in Reg A and Reg Crowdfunding securities. I think modernizing our fixed-income markets is another thing we all can agree is an objective that would benefit investors in the market. In addition, transfer agent rules are extremely outdated.

I'm excited about the prospect of us getting together on these issues and working together.

--Editing by Alanna Weissman.

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