My last two blogs discussed the role of executive compensation professionals and/or Compensation Committees in improving companies’ ESG scores and how to accomplish that. I did not take a position on whether ESG ratings were a good idea or not but instead focused on the practical reality of dealing with (improving) them. In recent remarks to the American Enterprise Institute, SEC Commissioner Hester Peirce compared the practice of “public shaming” of companies that do not adequately satisfy ESG standards to that depicted in Nathaniel Hawthorne’s The Scarlet Letter (indeed, the title of her speech was “Scarlet Letters”). Commissioner Piece does not think too much of ESG ratings and seems to think even less of “self-identified ESG experts that produce ESG ratings.” And she doesn’t sugar coat her views.
We are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world. In these remarks, I will focus specifically on the way in which corporations are being assessed according to Environmental, Social, and Governance (ESG) factors. Here too we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people. In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.
This is a developing area in which companies should make their voices heard – one way or the other. Maybe I am a pessimist, but I have a hard time envisioning a decline in the importance of ESG issues. Additionally, as a compliance lawyer (like many of you), I am for now focused on helping clients’ improve their ESG rating for the 2020 proxy season.