If Securities and Exchange Commission (SEC) Chair Gary Gensler had his way, corporations would now face rigorous new disclosure requirements on various environmental, social, and governance (ESG) issues, including climate matters and workforce management. However, despite Gensler’s ambitious ESG agenda over the past three years, many of his proposals remain unresolved. This political and regulatory gridlock comes at a time when ESG enthusiasm appears to be waning.
Gensler’s tenure has seen an aggressive push to expand the SEC’s regulatory reach, often at the expense of the traditional administrative rulemaking process. This approach has led to several setbacks, including the invalidation of the stock buyback rule and the failure to repeal the proxy adviser rules from his predecessor, Jay Clayton. Additionally, the SEC’s Inspector General has reported high attrition rates and overworked staff, illustrative of the broader challenges and pressures under Gensler’s leadership.
One significant change under Gensler’s leadership was the expansion of shareholder proposals. The SEC now requires companies to include proposals on any topic deemed “significant” by staff, irrespective of its relevance to business operations or materiality to investors. This broad mandate has invited unconventional proposals, such as internal audits of civil rights policies, which have seen diminished support from key asset managers like BlackRock Inc. and Vanguard Group Inc.
Compounding these issues, a Stanford University 2023 survey revealed a drop in enthusiasm for ESG among younger investors, partly due to greenwashing scandals. This trend further suggests that companies might be less inclined to invest in pre-adoption compliance, given the uncertainties and potential unnecessary costs involved. As a result, companies are likely to shift towards more traditional and tailored approaches to ESG topics.
Strategies companies are likely to adopt include:
- Prioritizing compliance initiatives that impact shareholder value. Companies will focus on efforts that directly affect financial performance and shareholder interests.
- Continuing to stay informed about regulatory changes. Organizations must keep abreast of potential updates from the SEC and other authorities.
- Communicating clearly with investors. Transparent explanations on how compliance efforts protect shareholder value and align with financial performance are crucial.
Gensler’s stalled ESG agenda may reinforce decreasing enthusiasm for ESG, a trend that could persist beyond the upcoming elections. However, it’s possible that a more pragmatic and centrist approach to ESG might foster a balanced resurgence in these initiatives.
For more in-depth analysis and perspectives, the full article by Lawrence Cunningham can be read here.