2013 SRI policy priorities

By Michael Kramer

(This article first appeared in the Spring 2013 edition of the Natural Investments News)

The start of President Obama second term offers a natural opportunity to assess the nation’s financial oversight policies from the perspective of investors who stress financial responsibility and sustainability as criteria for making sound investment decisions. The fragility and volatility of the global economy has shaken investor confidence for nearly five years now, since 2008 when excessive risk-taking and either poor or nonexistent regulatory oversight led to the collapse or near-collapse of many of our largest banks, investment firms, and insurance companies. In fact, according to the Chicago Booth/Kellogg Financial Trust Index, 79% of investors have no trust in the financial system, while 64% of Americans believe, according to The 2012 Ethics and Action Survey: Voices Carry, that corporate misconduct was a significant factor in bringing about the current economic crisis.

Four years ago, the apparent receptivity of the President’s transition team to these issues gave reason for hope among sustainable and responsible investors that systemic financial reforms would be put into place and that the business risks associated with climate change would become seen as material to the financial bottom line. Though financial institutions, and the power they wield over Congress, has delayed the implementation of important financial reform laws and regulations since 2009, let’s check on the progress to date:

The Securities and Exchange Commission (SEC)
Despite the fact that a lack of regulatory oversight was partially responsible for the Great Recession of this generation, Congress continues to fail to provide the SEC with the budget and staff necessary to monitor, investigate, and hold accountable those individuals and institutions that put the American people at risk through either negligence or abuse. Unfortunately, the SEC only has 10 examiners for every trillion dollars in investment advisor assets under management (it was 19 back in 2005), and its $1.3 billion annual budget and 5100 staff must oversee 10,000 investment advisers, 9,700 funds, 4,500 broker-dealers with more than 160,000 branch offices, 9,100 reporting companies’ disclosures and financial statements, 450 transfer agents, 15 national securities exchanges, 8 active clearing agencies, 9 nationally recognized statistical rating organizations, as well as the Public Company Accounting Oversight Board, Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and the Securities Investor Protection Corporation. By comparison, the FDIC has twice the budget, $2.7 billion, and over 8000 employees to monitor 7700 financial institutions. And then came the Dodd-Frank legislation, which calls for more diligent oversight by the severely under-funded SEC.

The rulemaking related to the Dodd-Frank Wall Street Financial Reform and Consumer Protection Act continues to be delayed thanks to the sheer volume of rules to be drafted as well as lawsuit threats from the U.S. Chamber of Commerce and other business groups (see this earlier post), but success has been achieved on several fronts: 

  • a proxy access rule gives shareholders the right to nominate directors to corporate boards and have those nominees appear in the proxy statements that publicly-traded companies must send to all shareholders ;
  • the SEC no longer automatically issues “no action” letters omitting shareholder proposals that ask management to undertake a risk assessment or review the financial implications of environmental, social and governance (ESG) issues, meaning the SEC now considers ESG issues as material to financial performance; 
  • publicly traded companies now must disclose their use of minerals sourced from “conflict” nations as well as disclose any payments made by resource extraction companies to other governments; and
  • an SEC Investor Advisory Committee was established to allow investors to provide direct input on existing and proposed regulations. The related Office of Investor Advocate is expected to be created soon.

Other SEC policy priorities currently in progress include:

  • disclosure by publicly traded companies of ESG-related risks, a long sought-after requirement that would inform investors of non-financial factors that can affect financial performance, and therefore shareholder value;
  • disclosure of corporate political contributions, which are a potential reputational risk since most people believe that the democratic and accountable functioning of society is compromised when access to decision makers and the policy making process favors corporate interests; and   
  • disclosure of executive compensation in relation to that of average employees, a pay disparity issue of great concern, particularly considering the high unemployment rate and the trend of shipping jobs oversees.

In addition to the crucial regulatory oversight provided by the SEC, larger systemic issues remain on our radar as well.  While comprehensive financial reform has remained an elusive goal, a couple of developments promise to make their benefits felt in 2013 and beyond.  The Consumer Financial Protection Bureau was indeed created and funded, offering new protections for citizens and clearer disclosure of mortgage and credit card fees.  Unfortunately, Senate Republicans have continued their refusal to confirm a Director for the CFPB, forcing President Obama to issue a controversial recess appointment of Richard Cordray through the end of 2013.

On environmental and climate change issues, progress has been frustratingly limited. The sustainable, responsible, and impact investment industry believes that robust authority and funding levels for the Environmental Protection Agency is necessary to require business to adequately respond to climate change, which is a direct threat to profitability and the U.S. economy, among others. And, the EPA’s Utility Mercury and Air Toxic Standard must be enforced to reduce harmful emissions and incentivize power producers to explore renewable sources for electricity supply.

Trackback from your site.

Michael Kramer

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

Leave a comment