Rise of the Shadow ESG Regulators
Rissman and Kearney’s post, and the law review article it summarizes, makes the case that the participation of the world’s largest asset managers in elaborating the SASB standards on corporate disclosure on sustainability will have a systemic impact on corporate governance, effectively forcing a significant increase in disclosure by publicly held companies about their environmental and social impacts.
Up until recently, an asset manager’s response to a company with excessive risk from social or environmental externalities would be to sell the stock, leaving the bad actor unperturbed. This is no longer an option for the largest asset managers due to their size. Institutional investors control an estimated 70% of stock holdings in the U.S., dominated by a handful of fund families. These firms are too large to move in and out of stocks with facility, and they include an increasing number of passive investors, who must own every stock in a broad index whether or not the individual stock is a desirable holding.
Meanwhile, the three largest asset managers, BlackRock, Vanguard and State Street, have joined the Investor Advisory Group of the Sustainability Accounting Standards Board (SASB). Indeed, SASB was conceived explicitly to formulate standards that comply with the U.S. Supreme Court’s definition of materiality, which governs what publicly held companies must disclose to the public. As a result, large asset managers now have a duty of care to their individual clients to engage with companies that insufficiently disclose their risks deriving from environmental and social impacts.
As the authors argue, that could be a game changer for overcoming the limits of securities law in mandating disclosure relating to climate change and human rights.
The full post can be found on the Harvard Law Forum on Corporate Governance and Financial Regulation.