Roisman Calls Out Asset Managers in Speech on ESG

In a recent speech SEC Commissioner Elad Roisman acknowledged increasing pressure from advocacy groups, politicians and investor groups for mandated ESG disclosure. But Roisman seemed to take a cautionary stance.  He cited a number of challenges, including the subjectivity and constantly evolving nature of the issues encompassed by the term ESG. “I have serious reservations about imposing prescriptive requirements in this area,” Roisman said, adding that this type of mandated disclosure “is often fraught with subjectivity and agendas that are often unrelated to “investor welfare.” Roisman declared, however, that the SEC may well be within its right to seek more ESG disclosure from asset managers because that disclosure is material to investors. Large institutional investors have been vocal in calling for specific ESG disclosure requirements on public companies or have directly asked companies for particular ESG information, Roisman noted.  He remarked that more asset managers are “asserting that ESG metrics are driving their investment decisions,” and that they will be using their ownership and voting power to effectuate changes in the companies they own (on behalf of investors). Roisman said these statements by asset managers raise questions such as: How are these firms using the ESG information to improve returns for investors and what analysis have they conducted to show the information provides alpha? He questioned whether  firms’ ESG statements were a strategy “to market themselves to particular potential clients, who have expressed a preference for environmentally or socially-focused portfolios.” Meanwhile, on June 23, 2020, the Department of Labor proposed amendments to regulations under ERISA that would effectively bar retirement plan fiduciaries from considering non-financial factors in making investment decisions for retirement plans, including 401(k)s. “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.” According to lawyers from Ropes and Gray, the DOL guidance will not have a major impact on the industry. “Because the proposal only would apply to a subset of the investor community, inbound asset flows to ESG, sustainable, responsible and impact investment strategies are expected to continue to increase, albeit perhaps at a somewhat slower pace. In addition, many large asset owners will continue to require managers across strategies to adhere to both affirmative and negative covenants relating to ESG matters.”