Recently, SEC Commissioner Peirce--one of the Republican appointees to the Securities & Exchange Commission--delivered a speech to Eurofi (a European think tank focused on financial regulation) in which she extensively criticized recent efforts by government regulators to impose ESG standards on companies (although she acknowledged that such views were "heterodox--some might say heretical" on the subject). Her critique focused on three issues: that (1) "ESG standards . . . drive private capital to uses that check the right officially sanctioned ESG box, not where it will best meet human needs and solve societal problems," that (2) "ESG rulemaking, by concentrating capital in favored assets, could become a source of systemic instability," and (3) "the considerable international pressure to converge on a single set of ESG standards" that could cause "poor choices [to] reverberate through the global economy."
Overall, many of Commissioner Peirce's objections can be characterized as common objections to the expansion of regulation. For example, Commissioner Peirce focused on the difficulties associated with the imperfect information available to regulators (e.g., "nobody . . . can prophesy where, when, and how the most important innovations will arise. A regulator trying today to drive capital flows toward green technologies might be doing the opposite inadvertently"). Similarly, Commissioner Peirce also opined on the prospect that regulation could create perverse incentives that would damage the economy (e.g., "[g]overnment regulation can . . . distort incentives . . . [and] could create a green bubble within the financial system as investors pour money uncritically into green assets."). Broadly speaking, these are typical arguments advanced against proposed regulations, merely applied to the ESG context.
Perhaps the most interesting aspect to this speech by Commissioner Peirce is that it demonstrates the continued resistance by the Republican-appointed commissioners on the SEC to the use of ESG standards in financial regulation. This issue--particularly with respect to climate change--has been a focus of the Biden Administration for over two years, and extensive resources have been devoted to implement policies aligned with this regulatory agenda. The lack of acceptance by the Republican commissioners--perhaps linked to continued political resistance on this issue, as demonstrated by state-level anti-ESG measures adopted by various Republican-governed states--indicates that this entire set of policy proposals could be undermined or reversed by a successor Republican administration to President Biden, raising the prospect of regulatory whiplash by the federal government, with the accompanying complications for regulated entities.
Let me state those views briefly. First, I am concerned that ESG standards, intentionally or not, drive private capital to uses that check the right officially sanctioned ESG box, not where it will best meet human needs and solve societal problems. Second, ESG rulemaking, by concentrating capital in favored assets, could become a source of systemic instability. The third concern, which exacerbates the first two, is the considerable international pressure to converge on a single set of ESG standards. If every jurisdiction directs capital using a single set of standards, poor choices will reverberate through the global economy.