Securities and Exchange Commission Investor Advisory Committee Meeting
Securities and Exchange Commission
Investor Advisory Committee Meeting
Thursday, November 7, 2019
Commissioner Allison Herren Lee, Securities and Exchange Commission
In her opening statement, Lee said that she has heard from investors that it is time for the U.S. to consider taking a commonsense approach to long term value building surrounding environmental, social and governance (ESG) principles. Lee continued that the Securities and Exchange Commission’s (SEC) engagement on ESG dates to 2010, adding that the agency should consider risks, disclosures and the roles companies play regarding ESG investing. Lee added that the afternoon panel would address concerns pertaining to Regulation D (Reg. D) offerings and general solicitations rules.
Panel I: Discussion Regarding Whether Investors Use Environmental, Social and Governance (ESG) Data in Investment/Capital Allocation Decisions
Jonathan Bailey, Head of ESG Investing at Neuberger Berman, stated that ESG considerations are important for investment professionals at his firm. He highlighted four key areas for the SEC to consider: 1) client intentions; 2) holistic approaches to ESG disclosures; 3) the importance of data used for disclosures; and 4) the potential role of the SEC. Bailey emphasized that there has been a 94 percent increase in demand by North American clients who expect ESG investment. He noted that with increased demand for companies to establish ESG principles, there is a need to consider the data that is required with a focus on company disclosures. He suggested that there is a lack of quality data and a disclosure framework for investors to make informed decisions on what investment to choose. Bailey stated that third party providers are available to provide a review of company ESG investment, but said they often are not forward thinking. Bailey recommended that the SEC consider regulation to help bring industry together, while also providing safe harbors and a framework for companies to tailor disclosures.
Satyajit Bose, Associate Director and Associate Professor of Practice Program in Sustainability Management at Columbia University, emphasized three main points: 1) investors occupy a crucial role in companies’ financial goals; 2) agencies must address the misalignment of incentives between investors and corporations; and 3) there is robust positive correlation between measures of sustainability of ESG metrics and financial performance. Bose said that there is a need to aggregate decentralized and diverse information so that investors can better understand company engagement in ESG policies. He noted reports suggesting that ESG measures are more aligned with financial operations performance rather than market performance. Bose added that there are a few measures, such as mutual funds, that are not good measures of ESG investment. He recommended that the market catch up to financial operation performance and that every investment manager implement ESG investing when managing client portfolios.
Michelle Dunstan, Portfolio Manager, AllianceBernstein, stated that her firm has incorporated ESG analysis when creating value for clients, as she believes ESG policies help deliver returns. She highlighted three steps her firm has taken pertaining to ESG engagement: 1) analysts consider materiality and impact of each ESG issue as well as the financial ramifications; 2) portfolios are developed with explicit ESG goals; and 3) the firm has examined their own sustainability and corporate practices. She added that AllianceBernstein offers tools and training for managers, as well as proxy voting guidelines for voting purposes. Dunstan recommended the SEC take the lead on standardizing ESG data guidelines.
Rakhi Kumar, Senior Managing Director and Head of ESG Investments and Asset Stewardship, State Street Global Advisors, said that ESG issues are relevant to the long-term performance of companies and should be considered during the investment process. She echoed the need for high quality financial material and consistent disclosures, which are comparable for investors to make informed decisions. Kumar added that data should be standardized and there should be an ESG system that scores companies engagement in relevant policies. Kumar added that State Street uses an internal system to measure company engagement when informing investors of company activity and investment, as well as proxy voting. She stated that investors need a deep understanding of which ESG principles are embedded in their investment portfolios. Kumar added that ESG principles are important indicators of a company’s future performance for her team and firm’s investors.
Jessica Milano, VP and Director of ESG Investment Research, Calvert Research and Management, said that the goal is to work towards using ESG data for investment decisions. She continued that not all ESG data is relevant for investors, and that an ESG policy can affect a company’s operations. Milano said that research shows that firms that score highly on ESG material exposure disclosures financially outperform those that do not score well, and that immaterial ESG issues underperform. She suggested that there is a need for regulatory guidance to deter “boiler plate” ESG disclosures and provided support for the SEC’s requirement for human capital disclosures. She further offered support for a perspective based and material metrics-based data approach when building a framework. Milano said that the Sustainability Accounting Standards Board’s (SASB) guidelines are a good framework to start with when developing guidelines. Milano added that the framework should ensure comparability and the ability for investors to analyze the information disclosed.
Question & Answer
Anne Simpson, Investor Advisory Committee (IAC), asked about ESG themes, SEC guidance, and market level risk. Milano said that low level requirements of disclosure are problematic and recommended that the SEC human capital model, TCSD climate risk model, and SASB standards be used as starting points for a framework. Kumar, Bailey and Dunstan all echoed similar points about following those models. Bose added that it is important to prioritize the areas with consensus as the areas to build around first. Dunstan added that ESG principles must be measured in an accumulative measure, rather than for one issue or one company.
Damon Silvers, IAC, asked whether the SASB standards are adequate. Kumar said they bring consistency and a quality of data to building a framework. Milano said SASB is not a regulator and that the SEC should consider a discourse framework for enforcement purposes.
John Coates, IAC, asked if the SEC should conduct a survey on what internal ESG data has already been collected. Bailey said that more evidence and information would be helpful.
Barbara Roper, IAC, asked about materiality and consistency. Bailey, Dunstan and Kumar reiterated the importance of the SASB standards as they generate a basis of information and requirements for companies to meet for investors.
Heidi Stam, IAC, asked what specific data needs to be considered for general disclosures of material risks. Kumar said the current thinking pertaining to risks need to be expanded. Bose suggested considering risks beyond the four basic market factors for risk.
Lydia Mashburn, IAC, asked how investors view ESG investment. Kumar said that investors want boards to address ESG principles and that due diligence is important for clients. Dunstan said clients want to know the process, systemic measures, and ESG engagement by companies. Milano added that investors understand that ESG funds should be based on materiality performance. Bailey added that inaction by the U.S. does not mean the rest of the globe will not move forward on ESG engagement.
Panel II: Discussion Regarding the Securities and Exchange Commission’s (SEC) Concept Release of Harmonization of Securities Offering Exemptions
Tyler Gellasch, Executive Director, Healthy Markets Association, stated that the SEC aims to promote the flow of information through timeliness and accuracy. However, he said that the current securities exemptions laws do not help level the playing field for investors and issuers. Gellasch expressed that investors need information regarding issuers’ governance. He continued that there is a sizable amount of exemptions and nuisances that follow, which lead to inefficiencies and a lack of transparency in the markets. Gellasch recommended that the SEC and IAC avoid prescribing exemptions that further stifle public market funding. He added that due to the decreasing amount of public companies and lack of transparency in private markets, investments are increasingly moving outside of the U.S. Gellasch recommended that the SEC consider exemptions and rules that increase accountability measures and availability of data.
Sara Hanks, CEO, CrowdCheck Inc., suggested that since the passage of the Jumpstart Our Business Startups (JOBS) Act of 2012, the expansion for exemptions under Regulations A, C, and D offerings has increased and made reporting difficult for companies. She continued that information requirements and timings have become a concern for smaller companies. Hanks recommended that the SEC stop regulating offerings and focus on sales when it comes to investor protection. She noted that the focus on general solicitation is a “wasteful” effort. Hanks expressed support for a number of policies which included expanding the definition of accredited investors, adjusting for financial measures and inflation, single securities special purposed vehicles, crowdfunding cap tables, exemptions expansion and harmonization of the secondary markets.
Renee Jones, Associate Dean of Academics and Professor, Boston College Law School, stated that new exemptions have resulted in increased risks for investors as well as regulatory safe harbors for issuers. She recommended the SEC clarify exemptions and the definition of accredited investors. Jones added that the SEC should not allow for a repeal of the ban on solicitation. Jones suggested the SEC consider what they would be aiming to harmonize and that the current regulatory framework needs amending before new regulations are created.
Catherine Mott, CEO, Founder and Managing Director, BlueTree Capital Group LLC, suggested that harmonization, or new regulations, should consider the consequences regarding angel investors and entrepreneurs. She stated that harmonization should strike a balance that helps facilitate innovation and capital formation in the U.S. Mott also said that there is significant confusion pertaining to general solicitation.
Andrea Seidt, Ohio Securities Commissioner, said the two greatest threats that she has witnessed are unregistered offering and unlicensed promoters. She also stated that post the JOBS Act of 2012, she had not considered the opaqueness and potential for risky deals in the market. Seidt said exemptions have deterred companies from going public and resulted in a lack of transparency for investors. She suggested the SEC consider looking into the failures of the private marketplace, accredited investors and preemptive rules for the secondary markets.
Jennifer Zepralka, Chief, Office of Small Business Policy, SEC, explained the different parameters of the harmonization framework the SEC sought public comment on. She said the framework considered areas for the SEC and IAC to improve offerings exemptions including general solicitation, accredited investors, secondary market resale exemptions, investor credential revisions, quantitative data, capital formation, risk mitigation, overlapping exemptions and Regulations A, C, and D. She added that the framework received over 150 public comment letters and the IAC will work to consider improving the framework.
Question & Answer
Coates asked about the impact of China in U.S. markets. He also asked how the SEC should address fraud. Mott said that large companies have expressed that they plan on investing roughly 50 percent of their capital in China, which makes it difficult for smaller firms to compete. She recommended addressing these areas for venture capitalists and to stop generalizing all entrepreneurs. Gellasch said that he has not heard of large corporations investing 50 percent of their capital in China. However, he reiterated that the U.S. public market is shrinking, and the opaqueness of the private market is leading to more investment outside of the U.S.
Silvers asked how to best measure sophisticated investors and address deregulation. Gellasch stated that the broader economy is at risk when investors lack information about the private markets. He added that wealth and income is not directly correlated to be a sophisticated investor. Jones echoed that point and said that there is a need for oversight of management.
Roper asked how venture capital system changes have been accounted for in the markets. Jones said that since the 2008 crash, money have been flowing into private equity, creating a founder friendly model. Gellasch said that there should be a consideration of thresholds for companies going public based on beneficial ownership. Mott added that small fund firms hold their executives and board members accountable. Hanks said that clients should not be forced to go public and that shareholder records are meaningless, as they can be bypassed.
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