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In the worlds of corporate governance and investing, the hottest buzzwords are Environmental, Social and Governance, or ESG. ESG considerations are making their way into the board room, corporate disclosures, and investor considerations for many reasons.
The concerns and goals of investors change over time. What investors find relevant today is different than it was in 1960 and will be different from today in 2060.
How investors choose to invest has also evolved. In the 1950’s only about 25% of Americans invested in the markets, with 80% owning shares individually. In 2020, 55% of Americans are invested in the markets, but nearly 80% of U.S. stock market capitalization is owned by institutions such as mutual funds, pension funds, and exchange-traded funds, that vote shares or issue shareholder proposals during shareholder meetings.
Many corporations now must communicate with a variety of different groups—investors, employees, consumers, their supply chain—and are using new and different communications tools to do so. While many are used to annual reports and proxy statements, which provide information to investors under strict adherence to legal requirements, over 80% of the S&P 500 now issue sustainability reports. These reports cover a wide variety of topics well outside the confines of SEC reports.
Since 2016, the U.S. Chamber has engaged in ongoing discussions with business leaders, investors, policy makers and academics to understand the role of ESG and how it is changing corporate governance and investing.
- In 2017, the U.S. Chamber issued a report on the importance of the materiality standard, as defined by Supreme Court Justice Thurgood Marshall in the TSC vs. Northway decision, as the critical factor for disclosures.
- In 2018, the U.S. Chamber’s Foundation published a report on the evolution of ESG and how companies were responding.
- In 2019, the U.S. Chamber released principles on ESG disclosures encouraging industries to work with investors on industry specific standards to meet the needs of their investors and to reflect the circumstances and context of standalone industries and businesses.
Regulators are also taking notice. The SEC recently asked the public to comment on possible disclosures on human capital, while the European Union has solicited comments on their Sustainable Finance Directive. The U.S. Department of Labor also proposed a rule for ERISA plan fiduciaries requiring that investment decisions be based on pecuniary factors. The U.S. Chamber commented on the SEC and EU proposals and will comment on the DOL’s proposals.
While the U.S. Chamber is supportive of the development of ESG investing, investors must put economic return at the heart of their decision-making process when investing on behalf of others. There is a distinct difference between investing solely to make a social impact without regard to the return and investing on behalf of others that wish to maximize economic return.
ESG is continuously evolving—just like our markets. In 1955 investors had to seriously consider the impacts of the Cold War and superpower confrontation with the Soviet Union on their portfolios. Obviously, the Soviet Union no longer exists.
Today, for many companies, climate change and carbon emissions impact long-term value, thereby becoming a factor that retirement fund managers should take into consideration. Cybersecurity is also increasingly a concern that investors will have to consider. These are issues that represent an evolution in the way we invest and are top of mind for institutional investment firms and individuals.
Regulators are absolutely right to update regulations in order to ensure that institutions always prioritize economic return over other factors when making decisions on behalf of retail investors. That is common sense and government policies need to ensure that return and evolving investor needs go hand in hand.