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Two Years After the BRT Statement: Making Policy Sense of ESG

It turns out that August is a busy month in the world of corporate governance.

Two years ago today, Business Roundtable (BRT) made waves when it announced, along with over 100 company signatories, that it was committing itself to “stakeholder capitalism.” The commitment to engage stakeholders has been widely interpreted as a dedication to evaluate environmental, social, and governance (ESG) factors in corporate decisions.

Following the release, many companies argued that the statement was simply confirmation of existing practices. Others heralded it as a new age in corporate governance. Still, others pointed out that in the end, securities law places a premium on shareholder rights.

Earlier this month, academic research argued that the BRT statement was “mostly for show.” Corporate promises, they found, continue to be “illusory” in terms of ESG and stakeholder interests. This was mildly corroborated by a JUST Capital survey released this August. In that survey, pluralities of respondents said that “companies have not significantly shifted their focus away from shareholders to the benefit of other stakeholders.”

Yet according to the JUST Capital survey, a “more evolved form of capitalism” continues to be important for Americans. They want corporations to prioritize stakeholders alongside shareholders and disclose their environmental and social impacts.

The trick is what to disclose and how to disclose, which is where certainty erodes. Also this month (told you August was busy), the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) released results of an ESG survey of companies. While the survey found that more companies have been publicly reporting on issues like climate change, it also highlighted a significant lack of clarity on these issues.

Just 8% of companies in the CCMC survey said that ESG “encompasses a generally understood set of issues” and 61% said ESG is a subjective term and means something different to different sets of interested parties, whether companies, investors, or regulators. As Politico summed it up, “ESG? WHUT?”

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Impending SEC Action

As it happens, this August falls right between the end of a comment period and the beginning of a likely rulemaking period at the Securities and Exchange Commission (SEC). Over the spring and summer, the agency received over 500 comments in response to its request for information regarding climate change disclosure. The general expectation is that the SEC will announce proposed rulemaking in October on climate change disclosure with workforce metrics soon to follow.

Congress is also paying more attention to ESG and stakeholder capitalism. In June, the House of Representatives narrowly passed H.R. 1187, The Corporate Governance Improvement and Investor Protection Act of 2021. While it’s unlikely to go any further, the bill sets down markers for where most Democrats would like to go with corporate governance policy. Although the bill passed along partisan lines (with four Democrats voting against), it did contain some elements that have attracted bipartisan support in the past. Congressmen Gregory Meeks (D-NY) and Bill Huizenga (R-MI) joined the Bipartisan Policy Center last month for a discussion of some of those areas of agreement.

The lack of clarity and standardization highlighted in the CCMC survey is part of the reason why many corporate leaders are calling for government action. At last week’s Fortune CFO Collaborative, “there was clear support for SEC action to require companies to disclose both sustainability and diversity metrics.”

From Standards and Frameworks to Metrics and Disclosure

Disclosure is the heart of the matter. Publicly releasing information that is financially material to investors is a bedrock principle of American corporate law. “Good information,” said Curtis Ravenal at another recent BPC event, “is the lifeblood of good decision making.” Ravenal was a founding member of the Task Force on Climate-Related Financial Disclosures (TCFD).

To be intelligible and usable, information needs to be standardized in comparable frameworks. Metrics in the absence of definitions are simply noise. That doesn’t behoove companies, policymakers, investors, or any set of stakeholders.

Perhaps this helps explain the divergent opinions around the two-year anniversary of the BRT corporate purpose statement. The various parties involved—corporations, regulators, investors, elected officials, advocates—are all reading from different handbooks when it comes to ESG and stakeholder capitalism. The handbooks don’t even appear to be written in the same language.

Long-running debates over the meaning of “material” have been reopened. There is some coalescing around the use of third-party standard setters regarding ESG but many U.S. policymakers are still trying to get a basic understanding of what ESG means and what role they should play. Meanwhile, the European Union has forged ahead with regulatory action on disclosure and ESG regulation, with many American companies affected. Recent actions by the Chinese government in reining in its multinational companies have alerted many in Washington to the central relevance of corporate governance to many other policy areas.

Yet one takeaway from the various August happenings is that U.S. policymakers don’t have a good idea of how to proceed.

Sensemaking for Policymaking

We’re trying to help both companies and policymakers make sense of this landscape. Political differences span the entire spectrum. Many on the left want more extensive corporate disclosure in more areas—and for that disclosure to be mandatory. Many on the right are resistant to such mandates—yet they are concerned about certain dimensions of corporate governance.

Through events, content, and more, the Bipartisan Policy Center is seeking to help find a way through the morass. Maybe, by next August, we’ll be able to point to bipartisan progress in a few areas.

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