Entire SEC must be involved in climate risk, ESG policy changes, says member Peirce

Securities and Exchange Commission member Hester Peirce said Friday that the entire commission should take part in any decisions to substantially change its oversight of sustainable investing.

On Thursday, the SEC announced the formation of an enforcement task force on climate and environmental, social and governance issues. That move was the latest in a recent flurry of agency activity at the direction of Acting Chair Allison Herren Lee that also included a directive to ramp up reviews of corporate climate disclosures and an elevation of climate and ESG in examination priorities.

The launch of the task force prompted pushback from Peirce and her fellow Republican commissioner, Elad Roisman. In a statement Thursday, they questioned exactly what the intense ESG focus means for the agency.

“You would hope we’d provide the guidance before we start bringing the enforcement actions,” Peirce said Friday at the online Investment Adviser Association Compliance Conference. “Part of the point of the statement that we put out was to say, ‘Hey, if there’s really going to be a sea change, then the commission needs to be involved in whatever that sea change is.’”

In a statement on Thursday, the SEC said the task force will “develop initiatives to proactively identify ESG-related misconduct,” such as inadequate disclosures and misalignments between what advisers and funds are promising about ESG strategies and what they’re pursuing.

Peirce said there’s likely to be an uptick in climate and ESG cases because of the task force’s work.

“You better have the legal authority for those cases and also the facts to back them up,” she said. “That’s something that in my position as a commissioner, I’ll be looking at each case on its merits.”

Peirce said the latest SEC actions seem to be a continuation of the work the agency has been doing for a long time on disclosures by companies, funds and advisers.

“From the investment adviser perspective, it’s important for advisers and asset managers who are running funds to be telling folks what it is their objectives are and how they’re achieving those objectives,” she said. “That should actually match reality. But I think that’s pretty well understood for fiduciaries — that they need to be upfront with their clients.”

But Peirce said advisers shouldn't overpromise about results when it comes to ESG strategies.

“It can be very tempting just to adopt this Pollyannaish view that ESG investing … no matter what approach they take, it’s going to lead to higher returns than non-ESG investing,” she said. “If you’re going to claim that, then bring along the empirical research to show — and it can’t be just this generalize empirical research. It needs to be very specific to the path that you’re taking to do your ESG investing.”