Allison Herren Lee, from Trump appointee to new face of regulatory ESG push in Washington

posted by Marsha Vande Berg on March 29, 2021 - 12:59am

SAN FRANCISCO (Callaway Climate Insights) — The ESG investment phenomenon is reframing financial markets at pace in the face of a post-pandemic landscape, yet U.S. regulators are only now beginning to publicly embrace the critical importance of sustainability disclosure to market accountability.

There are indeed glimmers of a new path forward for ESG disclosure rules in Washington. This is remarkable in and of itself in that these inklings are in sharp contrast to the last four years of Trumpian “American First” mentality, including at the SEC.

Allison Herren Lee, acting SEC chair these past two months, suggested before an Investment Company Institute (ICI) virtual audience on Wednesday, that it is high time U.S. regulators shake off their sluggishness and reckon with what is an emerging new landscape that is being driven by institutional investors with demands for credible corporate disclosure on environmental, social and governance issues.

Significant is the growing use of proxies, including for ESG-related issues, that are voted on by investment fund fiduciaries on behalf of their investors. It is critical, she said, that investment managers ensure that they are accountable and do what they have promised their investors.

This makes credible disclosure all that more critical as the linchpin for transparent communication with markets, Lee said.

Funds of all stripes need to face the new realities, working together with the SEC to ensure that retail investors whom the funds represent can hold companies and their executives accountable for the decisions they make.

It’s an “agency cost at the heart of corporate governance today and that is why it is critical that we at the SEC — along with all of you in this virtual room — focus more attention on fund and adviser voting duties and disclosure.”

The acting SEC chair was similarly explicit about ESG disclosure albeit generally in separate remarks on March 15 before an audience hosted by the Center for American Progress in Washington DC. While she was clear that any specific disclosure rules remain a long ways off, she set the stage for what may be expected from U.S. securities regulators, in particular relating to the international debate that now is pushing to identify a global baseline for sustainability disclosure ahead of the COP26 gathering in November in Glasgow.

“No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system and our economy.”

She said it is imperative that the SEC get engaged. “Precisely because the risks and opportunities related to climate and ESG cut across all manner of boundaries, the SEC must do its part, in concert with market participants and regulators around the globe, to address these issues.

“The lack of common benchmarks and standardized language will continue to inhibit to some degree competitive dynamics around managing climate and other ESG risks.”

Lee also noted that she favored a recent statement from the leadership of IOSCO (the International Organization of Securities Commission) in support of creating an international sustainability standards board under the IFRS Foundation. The foundation is a non-profit international standard setter responsible for the global principles-based accounting standards known by their acronym IFRS (International Financial Reporting Standards).

These rules and standards are used for corporate financial disclosure in multiple jurisdictions while U.S. corporates, among others, disclose in line with the rules-based GAAP rules and standards.

Lee, a Trump appointee to the SEC in 2019 and a securities lawyer by profession, also publicly ditched the Trump-era jargon of the past administration in favor of the U.S. regulator getting back in the game and assuming a leadership role. By the same token, she indicated she favored a set of ESG standards for U.S. corporations under SEC oversight.

Earlier, John Coates, acting director of the SEC’s Division of Corporation Finance, issued a public statement which assured investors that the regulator intended to step up its regulatory scrutiny at pace with the growing momentum in ESG markets. “The SEC should help lead the creation of an effective ESG disclosure system,” he said in his statement.

Any precision in the shape the SEC’s direction takes going forward will have to await the arrival of the next SEC chair, however. Former Commodity Futures Trading Commission (CFTC) Chief Gary Gensler is expected to assume that post in the near term. He recently received the bipartisan endorsement from the Senate Banking Committee and is awaiting his Senate confirmation hearing.

Gensler established himself as pro-regulation regulator while at the helm of the CFTC. He also was deeply involved in the formulation of Dodd-Frank in the post-2008 global financial crisis era. It is widely anticipated in the industry that Gensler will bring regulatory clarity on a number of fronts, including ESG.

“No single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system and our economy,” said Lee in describing her two-month tenure as acting chair, according to her prepared remarks to the Washington DC audience.

The ICI three-day conference is slated to conclude on Friday, with a focus on diversity and keynote remarks on ethics and decision-making in investment and business together with a behind-the-scenes look at American politics.