Gensler’s Stalled ESG Agenda May Spur Firms to Slow Compliance

If Securities and Exchange Commission Chair Gary Gensler had his way, companies would now face stringent new disclosure requirements on stock buybacks, climate matters, workforce management, and other environmental, social, and governance issues.

Despite Gensler’s ambitious ESG agenda over the past three years, many of his proposals remain unresolved. As we approach the election, the ESG movement appears to be weakening.

Gensler’s aggressive approach involved pushing boundaries of the SEC’s statutory authority and minimizing the traditional administrative rulemaking process. This strategy led to significant setbacks, including invalidating the stock buyback rule and the failure to repeal a compromise on proxy adviser rules from Gensler’s predecessor, Jay Clayton.

Additionally, the SEC’s Inspector General reported overworked staff and high attrition rates under Gensler’s leadership, indicative of the broader challenges and pressures created by his aggressive approach.

One of the major changes under Gensler’s tenure was expansion of shareholder proposals.

The SEC required companies to include proposals on any topic deemed “significant” by staff, regardless of their relevance to the company’s business or materiality to investors. This broad mandate opened the door for increasingly unorthodox proposals—such as internal audits of civil rights and policies on employee access to abortion services—which led to diminished support from key asset managers such as BlackRock Inc. and Vanguard Group Inc.

The SEC’s approach underestimated the headwinds facing the ESG movement. Despite initial enthusiasm, funds flowed out of ESG investment vehicles as returns failed to meet expectations. A 2022 meta-review of 1,400 studies found that ESG investing’s financial performance was, on average, indistinguishable from conventional investing.

Additionally, a Stanford University 2023 survey revealed a precipitous decline in enthusiasm among younger investors, partly due to greenwashing scandals that tarnished the credibility of ESG initiatives.

The zealotry surrounding ESG ignited a backlash, exacerbating conflicts between market-oriented versus regulatory approaches, shareholder primacy against stakeholder theory, and broader debates on capitalism. Under Gensler, the SEC’s overreach hindered rather than advanced the ESG agenda. A more balanced approach might have achieved more substantial progress.

As the US presidential election approaches, significant changes in ESG policy seem inevitable. With former President Donald Trump’s populist stance and Vice President Kamala Harris’ progressive track record, centrist ESG policies might struggle to gain traction.

Future SEC leaders should learn from Gensler’s experience and remain focused on their core mandate of investor protection. The chair should avoid becoming entangled in broader ESG advocacy and respect the legal limits of regulatory action, including acknowledging state corporate law prerogatives and the SEC’s specific congressional mandate.

That said, companies should be prepared to update their compliance strategies in response to proposed, pending, or anticipated regulations. During Gensler’s tenure, many companies initiated compliance programs based on anticipated SEC proposals, despite the associated costs and uncertainties.

Law and accounting firms often advised clients to proceed with these efforts, expecting that the proposals would eventually become binding or align with international regulatory trends.

However, with the current decline in ESG enthusiasm and a stalled regulatory agenda, companies might be less inclined to invest in pre-adoption compliance.

Advisers may need to carefully consider how to recommend pre-adoption compliance in the current environment. Companies could rationally decide that such efforts risk incurring unnecessary costs.

As a result, companies are likely to shift towards more traditional and tailored approaches to ESG topics. They can be expected to:

Prioritize compliance initiatives that impact shareholder value. Focus on efforts that directly affect financial performance and shareholder interests, such as improving transparency in financial disclosures and aligning executive compensation with long-term shareholder value.

Continue to stay informed about regulatory changes. Keep abreast of potential updates from the SEC and other authorities, and be prepared to adjust disclosure practices as needed.

Communicate clearly with investors. Provide transparent explanations of how compliance efforts are designed to protect shareholder value and how ESG initiatives align with financial performance.

The SEC’s stalled ESG agenda will likely reinforce waning enthusiasm for ESG, a trend that may persist beyond the election. However, it’s possible the ESG movement could rebound if proponents adopt a more pragmatic and centrist agenda, learning from past challenges to foster a more balanced approach.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lawrence A. Cunningham is incoming director of the University of Delaware’s Weinberg Center for Corporate Governance.

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