SEC Takes a Step for Corporate Accountability

Why should women, especially feminists, care that the Securities and Exchange Commission (SEC) just established a new enforcement initiative?

The new enforcement task force will have oversight on climate and ESG (environment, social, and governance) investing. Before the emergence of ESG investing, investors considered only financial factors such as profit margins and financial returns in their investment decisions. ESG investment decisions include an expanded analysis of a company’s environmental, social, and governance performance. This means that impacts like pollution, damages to a community, and diversity on corporate boards are becoming material concerns in investment decisions.

With its new initiative, the SEC has expanded disclosure requirements so that for the first time, all environmental, social, and governance data companies include in reports and publications must be accurate. Prior to this, only a company’s financial information was required to be accurate.

Most of us are keenly aware of the lack of women serving on corporate boards and the existence of a glass ceiling for women, particularly for chief executive positions. There are numerous studies documenting the failure of corporate America to include and promote women. In its 2015 report, The Power of Parity, the McKinsey Global Institute found that out of 22,000 global firms, 95% of the CEOs were male, with 60% of these companies without any women on their boards. Research on the tech industry finds sexism against women is entrenched from startup stage, where only 2.7% of the 6,517 tech companies receiving venture capital had women CEOs, to 41% turnover rates for women versus men at 17%. Today 91% of the executive positions in tech are filled by men.

Not much has changed over the decades, but the cadre of ESG investors who have been chipping away at these statistics is growing, and size is making a difference. The growth of ESG investing, which has increased 42% in just two years, from $12 trillion in assets under management in 2018 to $17 trillion in 2020, is driving change in the financial markets. For example, NASDAQ recently proposed a requirement that all listed company boards include at least two trustees from underrepresented groups — one woman and one person of color or LGBTQ person. Fortunately, information on corporate trustees is readily available, and investors who care about corporate governance can usually assess data on the diversity of boards for most categories. However, when it comes to social issues, such as community safety, well-being, and violence against women, the information is difficult to find or nonexistent, at least in company disclosures.

The problem is there are few if any tools for investors to gauge how companies are addressing social impact in their operations and supply chains. Conservationists are a good model for how we can make this information more accessible and actionable; they have made considerable progress in quantifying the costs, called risk premiums, for things like unburnable carbon, stranded assets, wasted capital, and fossil fuel. These costs and other metrics provide investors with tools to integrate climate and environmental costs into a company’s business model. Availability of information about social impacts such as violence against women, community safety, and social well-being is lagging behind environmental and governance data because social impacts are still seen as intangible and difficult to quantify and therefore lacking relevance.

However, if we don’t begin to document and quantify these social impacts, they will remain hidden and ignored. What gets measured gets counted. If we want these issues to be addressed, then they must be seen as material concerns. A concern becomes material if it affects the company’s profit and bottom line. Material concerns are the standard by which the SEC and its enforcement task force will get involved. Once the data is collected and companies are required to disclose the information, then social risks and social costs will be reported, and corporations can be held accountable to the community or the victims. In some cases, raw data must be collected before any material impact can be assessed. In others, existing data must be presented within the rigors of company costs, risks, and liabilities.

For example, very few studies exist that identify the social impacts for oil operations in a community. Yet these community impacts are so significant that Ernst and Young rated social risks as the number three priority of shareholders at annual meetings, where shareholders vote on issues key to company operations. Such was the case in the Bakken region of North Dakota. Drilling started in 2010, bringing an influx of cash and thousands of oil workers living in “man camps” with time and money on their hands. The rates for violent crimes increased by 44.1%. The Standing Rock Sioux Tribe vigorously opposed running the oil pipeline through their lands. In the end the tribe’s opposition cost the company and shareholders $12 billion, the company lost $7.5 billion, and the banks financing the pipeline lost $4.4 billion.

It is well recognized in the financial community that gender equality is a material factor in performance. Many studies show that better gender balance in decision-making teams, like boards of directors and executive suites, is correlated with financial outperformance, as well as things like greater innovation and better management of human capital. Economically, gender parity also offers benefits, and continued inequality is costly; Bank of America estimates that the loss of human capital wealth due to gender inequality tops $160 trillion globally. Discrimination, harassment, and sexual misconduct are also costly. One recent study estimated that the average damage of one case of sexual harassment in a company is $7.6 million. Managerial indiscretions are also costly; one study calculated that companies lose on average 4% of their value on disclosure of an incident, and continue to lose an additional 12-14% of their stock value over the succeeding year. Finally, any controversy can be costly for companies and their investors; Bank of America estimates that S&P 500 companies have lost more than $600 billion over the last seven years to controversies.

None of the investors I spoke with in writing this article remembers another time when the SEC turned to them for input. As feminists, we cannot afford to let this opportunity pass without engaging ESG investors and getting our voices heard.

This article was researched and written with the help of Julie Gorte.