ESG Investing Needs Clear, Smart Regulation—And Fast

The incorporation of environmental, social and governance (ESG) criteria into investment decisions is a popular, evidence-backed strategy to reduce risk. Yet some regulators remain wary of ESG, putting the continued growth of sustainable investing in doubt. For example, the U.S. Department of Labor (DOL) recently proposed a rule that would limit the ability of fiduciaries – investment advisors who are bound to act in the best interest of their clients – to invest in ESG funds for retirement products such as 401(k) plans. Similarly, U.S. Securities and Exchange Commission (SEC) leadership has pushed back against calls for ESG to be integrated into public company disclosure requirements, despite a statement from one of its own sub-committee advocating for clarity around how public companies report on these issues.

It’s clear that regulating how companies and investors disclose information about their sustainability practices is complex. ESG can be interpreted to cover many different kinds of issues, from carbon emissions to diversity and inclusion policies. Moreover, companies report on sustainability in different ways, depending on how material—or relevant—certain issues are to their business. And while there are many voluntary standards, there are no universal accounting frameworks for ESG reporting. However, many investors believe these discrepancies call for more regulatory action, not for authorities to dismiss ESG outright. With ESG-focused investment strategies having outperformed their counterparts during COVID-induced market turmoil, the argument that ESG factors are not financially relevant is losing credibility.

Investors and responsible business stakeholders are not backing down.

During the 30-day comment period for its rule, the DOL received 8,737 public comments, with the majority opposing to the rule as written. Even as U.S. regulators move to stem ESG, other governments are pressing ahead with more enabling policies. Global trends prove that the integration of ESG frameworks is here to stay, and the companies that want to compete on the global stage will continue to lead the way.