Regulating Sustainability in Corporate Governance Standards

In response to a growing understanding of climate change as a financial risk, President Joseph R. Biden issued an executive order earlier this spring, asking officials to submit reports on how to address climate-related financial risk by fall 2021. This executive order reflects mounting interest in environmental, social, and corporate governance (ESG) practices which seek to incorporate broader societal values into financial decision-making. Analysts predict that, by 2025, assets aligned with ESG values may reach $53 trillion, which would represent more than one-third of all assets managed globally. With ESG’s rise in popularity comes concern over the current global and local patchwork of varied ESG policies and regulations. The U.S. Securities and Exchange Commission (SEC), for example, released a risk alert this April about inconsistencies in approaches to ESG. To mitigate the negative impact from discrepancies, as well as to respond to President Biden’s executive order, the SEC issued a request for public comment on disclosure requirements that the agency might impose to help make ESG and climate related risk disclosures more consistent. Some experts argue that the information needed to disclose all of the climate-related risks that a company might create would exceed the requirements of current law, which only requires that “material” risks be disclosed. Others claim it is not possible to have the kind of clear, accurate, comparable, climate risk data the Biden Administration seems to be seeking about climate risks. Others, however, remain optimistic that, despite the difficulty in the assessment of climate risk, the severity of the problem supports, rather than undermines, regulatory efforts to compel greater disclosure of climate risks. The European Union has already adopted regulations for sustainable risk disclosure as a part of its Green Deal. Administrative agencies in the United States now face the task of determining how to wade through a tangled regulatory framework that currently impacts sustainable finance and determine effective measures for disclosing climate risks. How can U.S. regulators create a regulatory framework that effectively balances economic, social, and environmental needs? In this week’s Saturday Seminar, experts discuss the future of sustainability in financial regulation