Let there be no doubt about Hester Peirce’s feelings when it comes to environmental, social and governance (ESG) issues. During her tenure with the SEC, Peirce has developed a reputation for being outspoken on a variety of thorny regulatory matters. In a speech she delivered last month entitled “Scarlet Letters,” the Republican commissioner likened ESG evaluations of companies to the judgmental condemnation heaped on author Nathaniel Hawthorne’s protagonist Hester Prynne.
Here’s Peirce in her own words on ESG activism:
“Here too we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people,” Peirce said in remarks at the American Enterprise Institute (AEI), a conservative thinktank. “In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.”
This fiery take from Peirce falls in line with her previous comments on “stakeholders” acting as shadow regulators for companies. (Her message was something along the lines of “butt out.”) In her more recent remarks at AEI, she appeared to go a step further, dismissing ESG as “a shifting set of trendy issues of the day, many of which are not material to investors, even if they are subject of popular discourse.”
Peirce’s skepticism contrasts with the growing emphasis on ESG issues among major investors. Investment managers and analysts lined up to take whacks at her remarks, with Jon Hale of Morningstar noting that Peirce gave “a speech that hardly seemed appropriate given the office she holds.”
“One thing I’ve noticed about critics of sustainable investing is that they often seem to have no idea what they’re talking about,” Hale responded. “They concoct a caricature of ESG based on common misconceptions and use it to convince their audience how ridiculous the whole enterprise is.”
Hyperbole aside, Peirce’s position does offer some insight into practical challenges facing ESG activists. She’s not wrong in pointing out that “the environmental and social categories tend to be much more nebulous” when it comes to establishing the appropriate dimensions upon which companies should be evaluated. What are the right benchmarks for measuring a company’s racial and gender diversity? Its commitment to the environment?
To be sure, as ESG ratings systems proliferate, disagreement over best practices and standards will remain a hot topic in corporate governance. Yet, it won’t change the fact that a growing faction of investors want to see companies make a commitment to ESG. Peirce and other critics can dismiss their concerns if they’d like, but they’ll find the companies under their watch don’t have that luxury. As such, it seems inevitable that a government-mandated ESG reporting architecture might become a necessity.