Former US Securities and Exchange Commission (SEC) head Allison Herren Lee brought ESG issues to the top of the agency’s agenda. She is now helping Australian companies to gain some perspective.
The morning before Allison Herren Lee joined some of Australia’s leading directors for a sustainability risk discussion, she was heartened by news from the US. “Yet another anti-ESG rule has been struck down, this time in Missouri,” the former US SEC commissioner and acting chair told participants of the AICD roundtable held in August during her visit to Australia, which was hosted by the Melbourne Law School.
“That has occurred repeatedly and it’s because at the end of the day, economics and sound reasoning is going to win.”
She was referring to foiled legal attempts by the so-called “anti-ESG” movement in the US that had surfaced in the past few years to obstruct environmental, social and corporate governance (ESG) investment mandates and fight the shift of businesses towards considering sustainability risks and opportunities in their operations.
While she sees this as evidence that steam is coming out of the anti-ESG movement, the politically motivated backlash against sustainability remains a concern for Lee, who is credited with bringing ESG issues to the forefront of the SEC agenda. During her tenure as a SEC Commissioner (July 2019–July 2022), the US financial market regulator clamped down on “greenwashing” and pushed forward the mandatory climate disclosure rule introduced earlier this year, which Lee believes will give “much-needed consistency, comparability and reliability” to US financial markets.
“It wasn’t that the SEC stepped in and said, ‘Oh, we’re going to create guidelines’,” explains Lee of the new disclosure rule, which has been met with a mixed response, given the polarised views in the US on the issue. “The SEC leveraged what was already happening. This entire regime [of voluntary climate disclosures] has built up outside of the SEC, driven by the market. But markets that are unregulated do not function well... and will not mature. The SEC stepped in at the right time... and the value-add is strong.”
The new climate disclosure rule is set to become effective for financial year 2025 reporting, although it has been voluntarily stayed pending a judicial review of a legal challenge brought by stakeholders, including Republican-led states. Lee, who has been a securities law practitioner for more than 25 years, cautions that the rule may also be derailed if this year’s US election results in a Republican-controlled Senate. Should that happen, however, she is adamant that while the mandatory requirement may not last, that will not change the need for climate disclosures to meet the growing demand from investors.
Such a momentous change in US climate reporting regulations is among similar shifts occurring in most jurisdictions across the world, including Australia, spurred by climate change urgency. The related governance complexities have become a staple boardroom debate.
When navigating the regulatory maze, Lee’s message to Australian business leaders is clear. “Don’t let regulation lead you around,” she advises. “Of course, you can’t avoid it, you need to comply, but so does everyone else. That can’t be your goal as a business. Instead, you need to lead with strategy — be proactive, take command by figuring out which issues, risks and rewards are authentically relevant to your business.”
Collaboration and convergence
Lee also points out that despite the regulatory complexities, there are more commonalities across jurisdictions than may appear, and convergence is set to accelerate. She calls out the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Greenhouse Gas Protocol as being common to almost all jurisdictions, saying it pays for business leaders to focus on the commonalities rather than divergences. “I am also optimistic we’ll see greater regulatory convergence over time, because large businesses and multinationals are pushing very hard for that in both the US and worldwide,” she says.
She also lauds the work of the Transition Plan Taskforce (TPT) as “tremendously useful” on this front. Launched by the UK government in 2022, and now under the remit of the international accounting standards-setter IFRS Foundation, the taskforce is driving the development of global norms for private sector climate transition plans. These plans are fast becoming an important marker of an organisation’s strategic commitment to decarbonisation, and evidence of resilience and profitability in a net zero economy, therefore critical in a company’s ability to attract capital.
“The TPT has centralised a lot of cross- disciplinary thinking,” says Lee. “Just as the TCFD was wildly successful in terms of the way it worked with businesses and came up with a straightforward approach to risk management so that it works across the board for decision-making, I’m confident we’ll see something similar from the TPT.”
Despite the bumpy path ahead, Lee remains optimistic that the momentum of climate action will continue across the US. Underpinning her positivity was the passing of the “very encouraging” Inflation Reduction Act in 2022, legislation that contains groundbreaking investment to turbocharge the transition to net zero in the US. However, while she will continue to advocate an acceleration of climate action, she concedes the US lags behind internationally.
“That is problematic, because we’re a massive emitter... but Wall Street understands the risks here... and being an international laggard is not a comfortable place for US capital markets to be.”
Roundtable report
The consequences of how organisations confront environmental and social risks are too big to ignore. That was the unequivocal consensus of directors and senior leaders who came together with securities law expert and former US Securities Exchange Commission (SEC) commissioner Allison Herren Lee for a recent AICD roundtable discussion around the fast-moving sets of global sustainability regulations.
Among the raft of complex issues sitting top of mind for roundtable participants, were how to navigate capital allocation trade-offs, the influence of the prevailing geopolitical instability, making forward-
During a House Financial Services Committee hearing in Washington DC, September 2019 looking statements in an inherently uncertain landscape, and the growing need for open-sourced models for comparative analysis of climate transition plans.
A common concern was the tendency to spend more on sustainability reporting and compliance than on sustainability innovation, a weighting that all agreed needs to be flipped.
On this point, Lee was optimistic, given that initial reporting set-up costs would not necessarily be repeated in future years. She also noted that the benefits from compliance — namely, accurate risk pricing and allocation of capital — were rarely factored in and emphasised the need for the “reward side of the equation” to become a more significant part of the conversation.
“You can quantify the costs quite easily, but while the benefits are there, it’s often harder to put a number on them,” she said.
This balancing act has contributed to the trend of sustainability reporting shifting into the finance function in many businesses, along with the emergence of “ESG controllers” in recognition of the significant expansion in scope and skills needed of financial controllers — beyond traditional accounting.
“More CFOs want to control how this data is being produced and to move it into the finance function, so it has more of the Sarbanes-Oxley- type protections [US law passed in 2002 to protect investors from fraudulent financial reporting by corporations],” said Lee.
Among other points of discussion was the fine line between leveraging sustainability initiatives for individual competitive advantage versus industry collaboration for greater impact, all within the overlying context of competition law, an area currently under the consideration of the Australian Competition and Consumer Commission (ACCC).
This article first appeared under the headline 'Time of Transition’ in the October 2024 issue of Company Director magazine.
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