SEC Disclosures, Generational Wealth Transfer, and Next-Gen’s Impact on the future of ESG
A conversation between Net Impact's CEO Peter Lupoff and Climate Fellow Hilary Manzo
If you’re in the sustainability space, you’re well acquainted with the alphabet soup of acronyms. But there’s one particular set of letters that you’ve likely been hearing a lot more about recently: ESG. For the unfamiliar, ESG stands for Environmental, Social and Governance and is a system for investors to assess companies on their environmental and social impact. It’s hard to overstate the impact ESG has had on financial markets over the past 5 years. Since 2017 when ESG really started taking off (although the concept has been around since the 1960s), it has had an average annual growth rate of 28%. The market hit $1 billion in 2021 and is on track to reach $1.3 billion this year, and there’s no sign of slowing down.
While the explosion of ESG over the past 5 years is positive, there are some serious growing pains. One of the main problems we hear about with ESG ratings is the lack of transparency and consistency across the ESG universe. More specifically, one ESG crediting agency can score a company high on the “E” while another company scores it poorly, leaving investors with murky data to make key investment decisions. The explosion of ESG demand meant that there was no oversight to ensure transparency or consistency across the industry. This is extremely problematic because as the consequences of climate change become more severe each year, the “materiality” (whether or not events or information impact a company's financial statements) of climate risk is significant. While its intention is noble, investors are describing ESG as a “Wild Wild West” scenario, rendering the financial tool useless for its intended purpose: to protect investors.
To address this consistency gap, the Securities and Exchange Commission proposed a draft rule this April, aptly named “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” As one might expect, it’s been met with a lot of backlash from companies with a handful of concerns. I sat down with Net Impact’s CEO, Peter Lupoff. As an impact investor and educator, I was particularly eager to sit down with him to parse through these main critiques and get his take on the matter.
Let’s start with one of the main critiques we hear about this proposed rule, namely that this oversteps the authority of the SEC in that they’re creating policy that they don’t have jurisdiction to create. Do you see this as an overstep in authority by the Securities and Exchange Commission?
PL: The SEC is not in the business of policymaking. The SEC, for over 80 years, has had two main mandates. The first is about building fair and orderly capital markets that support business and our economy, and the second is about creating honest and fair financial disclosures about companies' prospects in order for investors to make informed decisions. Companies began disclosing their climate and environmental data back in the 1970s, and today, over 80% of top public companies in the US are making disclosures, in one way or another, about climate. And investors are demanding not just transparency but uniformity because data is spotty and largely self-selected. So if investors are concerned about a company’s long-term viability because of climate risk, and they should be, then this is the next logical genesis from fair and transparent financial disclosure to other kinds of disclosures around risk. It’s the next logical progression of our markets. The Task Force on Climate Disclosures (TFCD) represents trillions of dollars of investor capital that is calling for this. This is about protection for individual investors to ensure transparency and accountability. Those that throw rocks at these sorts of efforts are self identifying themselves -- they’re either old-thinking and not comfortable with the progress that’s occurring in markets, or they're self-interested and getting paid to keep the status quo. I applaud what the SEC is doing here toward protection for investors. My only hope is that we get to a place where our country can agree that climate science is real and that we need to preserve a planet for future generations. Managing capital market disclosures helps assure that business is nudged toward longer-term sustainability, as capital flows will go to where disclosure is best, and to those companies that are not putting themselves on a trajectory toward existential threat.
There’s another critique of this goes something like “We [companies] shouldn’t have to put out this data because climate data is inherently uncertain, and by the time it gets published it will be stale.”
PL: Public companies report quarterly, and they have an obligation to report 45 days after their fiscal quarter ends. So the financial data is also stale. The “staleness” of the climate data is no different than the staleness of their numbers. You have to start somewhere in terms of [climate] because these are genuine risks.
I can understand the company pushback on this, for sure. Increased disclosures means increased costs. There’s concern about not being painted in the best light, but obfuscation in the face of increased investor risks is not an acceptable answer. One in 4 dollars is invested through an ESG screen and is on its way to 1 in 3. We’ll have the single biggest transfer of wealth over the next 20 years - something like $68 trillion changes hands intergenerationally to a demographic that cares about how money is made. Markets are calling for it. Investors are calling for it. This is the transition.
You’re in the education space and teach Impact Investing at Fordham. What do you say to the people that say Sustainability and Finance are still pretty “church and state”?
PL: I’m optimistic about this because, as you point out, I still teach Impact Investing at Fordham's Gabelli School of Business. I also see what’s happening at other universities that we work with via Net Impact. University curricula are increasingly moving in this direction and are embracing responsible investing. I think ESG and CSR (Corporate Social Responsibility) principles are pretty standard features of most large business schools. Thirty years ago, the narrative “Business can be a force for good” might have passed as thought leadership. And today it’s really shifted to “Business must be a force for good.” There’s a palpable shift among next-gen influencing agency. I think it is the most breathtaking thing about this moment. The agency that all people have always had is now being insisted upon. People are saying, “we demand this.” Polls suggest that 87% of Americans, including 74% of Republicans, think businesses should be disclosing their climate risk. What more do you need to know? Who do companies report to? They report to their shareholders. Well, their shareholders are demanding disclosures.
Interested in the Impact Investing space? Check out Net Impact’s resources on the fundamentals of impact investing, career resources and informational videos from the experts, here.
Hilary Manzo is a Program Manager and Net Impact's Climate Fellow. She advises the organization's internal strategy for climate engagement, thought leadership and program design.