09 Aug ESG on the Global Stage
Again, the following commentary/forecast is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
ESG: Reaping Whirlwinds and Rewards
The news, of late, has not been great for practitioners of ESG. From Washington, where Republican legislators spent the last month investigating and assessing the impact of ESG-related matters on American capital markets; to various “Red” state capitals, where Governors, treasurers, and other elected officials continue to push back against what they perceive to be the deleterious impact of ESG mandates on their state pensions and investments; to Wall Street, where “the outlook for ESG is getting bleaker based on the results of Bloomberg’s latest industry survey.” Nothing, it seems, is coming up roses.
Of all the news, however, perhaps the worst – from the ESG supporter’s perspective – is that the world is quickly adopting sweeping ESG reporting standards, turning up the intensity of the campaign to compel corporations to detail and explain their efforts to comply with and prepare for environmental, social, and governance initiatives.
First up, in late July, was the International Sustainability Standards Board (ISSB), the latest iteration of the global ESG policeman:
The board’s inaugural standards are IFRS S1, which tells companies what information they need to disclose to investors about the sustainability-related risks and opportunities they face over the short, medium and long term; and IFRS S2, which sets out specific climate-related disclosures and is designed to be used with IFRS S1….
[T]he ISSB and its standards are designed to address this disclosure fatigue, continuing a process of consolidation in sustainability standards that started a few years ago….
Ilmi Granoff, senior fellow at the Sabin Center for Climate Change Law and Adjunct Research Scholar at Columbia Law School, says: “The ISSB standards are not fundamentally about a world of voluntary disclosure. They are emerging at a time when we are shifting towards regulated reporting regimes, and it is really important to harmonise those, and the language that different regimes are using – that is the key to convergence.”
The potential of a global baseline has already been partially fulfilled, with both the European Union and the Securities and Exchange Commission (SEC) working closely with ISSB.
Next up – almost immediately thereafter – was the European Union, which adopted and expanded upon the ISSB’s standards:
On July 31, the European Commission adopted the European Sustainability Reporting Standards. The ESRS will standardize how companies within the European Union report climate change and other ESG related actions. They are set to go into effect on January 1, 2024.
The standards stem from the European Green Deal, which required an assessment of sustainability performance by companies….
Environmental gets the most focus, with five standards. Those standards are ESRS E1 – Climate Change, ESRS E2 – Pollution, ESRS E3 – Water and marine resources, ESRS E4 – Biodiversity and ecosystems, and ESRS E5 – Resource use and circular economy. The commission announced that they have been working with the International Sustainability Standards Board in their development of the recently announced International Financial Reporting Standards Foundation Sustainability Disclosure Standards.
Now, you may be wondering how any of this could possibly be “bad news” for supporters of ESG. This is literally what every dedicated ESG advocate has been demanding for years: a clear, uniform set of standards by which all corporations, across all borders, must comply. It is the proverbial Holy Grail of ESG research and reporting.
This is all well and good, but it also misses the point. It’s not gonna happen. Note what Ilmi Granoff says above: “The ISSB standards are not fundamentally about a world of voluntary disclosure. They are emerging at a time when we are shifting towards regulated reporting regimes.” The standards are intended to push various polities to accept top-down, universal standards, to force the corporations under their jurisdiction to comply with a multi-trillion-dollar regulatory scheme. But what happens if a polity is unwilling or unable to impose these standards effectively? What happens if there is notable dissent within polities about the value of these standards and their enforceability under the law of the land?
The answer, in brief, is that the promised “harmonization” turns, instead, into dissonance. The expectation of a universal regime under which all business entities are forced to compete using the same rule book will be overtaken by reality, and some companies will benefit while others will suffer – and eventually fail.
Consider, for example, the People’s Republic of China. No serious person actually believes that companies within the PRC will be expected to meet Western ESG expectations or comply with Western reporting standards. And while the regime may, in theory, promise compliance, in reality, neither genuine compliance nor truthfulness will be required. And Chinese companies – free from this massive regulatory burden – will gain further competitive advantage.
In this case, however, it is not just mendacious, totalitarian regimes that pose a threat to ESG regulatory “harmonization.” As noted in this newsletter last week, the United States is possibly moving in the direction of reducing the unconstrained ability of regulators to impose their will upon their constituents. The potential overturning of the Chevron Doctrine coupled with increased Congressional regulatory oversight would inarguably doom the Securities and Exchange Commission’s ability to force corporations to abide by environmental rules that are far beyond its rather narrower legal authority. Even in the event that Chevron is not overturned, the Supreme Court’s 2022 ruling in West Virginia vs. EPA severely constrained regulatory agencies’ ability to address “major questions” without a specific legislative mandate. This ruling – and its implications – is presumably the reason that the SEC’s new environmental reporting standards have been delayed so long.
What this will mean in practice is that any overly burdensome rules issued by the SEC on environmental reporting will be challenged, repeatedly delayed, and, likely overturned – if not by the courts, then by the next Republican administration. In turn, then, American companies will also likely gain a competitive advantage over companies in other jurisdictions (the EU, for example), because American regulatory burdens will be considerably lower, either by design or litigation. Already, privately owned American companies will be exempt from any SEC rules, while large private companies in the EU will not be. This will, presumably, create an ESG-related boon for American private equity, if nothing else.
In the end, the top-down global ESG agenda is likely to suffer the fate of most such top-down global agendas: it will fail in the face both of authoritarianism on the one hand and constitutional republicanism on the other. The EU’s obsession with ESG and its willingness to subject its publicly and privately held companies to the type of Gnostic Millenarianism this obsession encourages will likely do severe damage to its business climate and its individual economies. Those regimes that resist the implementation of policies derived from such fantasies will, as a result, see a boost to their business climates and economic prospects. They will gain a competitive advantage.
Or to put it more bluntly, some will reap the whirlwind, while others will reap the rewards.
