FINRA’s Eileen Murray says the government needs to regulate ESG for real transformation to happen

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While much of the world has focused on environmental, social, and governance issues in recent years, more recently cracks have emerged in the way companies work on solving ESG challenges.

Eileen Murray is Chair of the Financial Industry Regulatory Authority and former Co-CEO of Bridgewater Associates, the world’s largest hedge fund. She sat down with us to discuss how to improve accountability in ESG reporting and the need for government regulation in this area.

(The content below has been edited for length and clarity.)

Leslie Picker: They were rather skeptical of what was going on with the entire ESG [Environmental, Social and Governance] Trend and really a frenzy in recent years. What do you think are the most important issues here?

Eileen Murray: My skepticism does not relate to ESG. I think we have to do that. I think the way we go about it there is a lack of consistency and standards in what is reported to the public. Who is responsible? Who is responsible for these disclosures? To the right. And what changes do we need to really make ESG a reality? You know, we are polluting the planet. How are we going to stop this? When I stepped down, I was skeptical – and I wouldn’t have said that 20 years ago – I really believe that we need the regulators to strengthen ourselves. You have got to certain parts of the world and are starting to make sure that companies are applying standards and disclosure, that companies are open and transparent about what they are doing.

It’s complicated. And you know, it’s evolving. So people say, “Oh, it’s too complicated. We can’t handle it.” Well, 20 years ago there were a lot of changes to how credit exposure reporting was done and people thought it was very complicated. The same goes for trade analysis. So I don’t think it’s so complicated that smart people can’t find solutions. But I think it will take regulators, corporations, and educators to deal with this. And it’s an ecosystem problem. One company cannot do this on its own and so I think we need governments and regulators. So my skepticism is not about the call to action, my skepticism is whether we are doing enough? Or will we wait until this is a pandemic that we have to deal with?

Picker: What do you mean – “wait until this is a pandemic to deal with?”

Murray: Take DE&I – how many years has it been around?

Picker: Diversity, Justice and Inclusion …

Murray: Diversity we’ve been talking about since I was in my 20s which was quite a long time ago. But you know when I started working diversity was such that 0.5% of executives were women and today it is 17%. And you know Leslie, I don’t know whether to dance happily or cry. But we just haven’t made enough progress. And I think if regulation had been more closely involved, we would have made further progress on diversity. I don’t think it’s all about diversity. I think it’s also about inclusion to be really successful and I think we both know that. One of the things, for example, what NASDAQ has just done is that I am not speaking as Chair of FINRA, but as Eileen Murray, individual, I applaud them.

Picker: Companies need to list certain diversity metrics.

Murray: Yes, and they basically say comply or disclose. So you either stick to it or disclose. Well what’s wrong with that? What is there to criticize? I just think without these kinds of movements we won’t make any progress. And I think history shows that … I think without disclosure and transparency, it will go on as it is, with people focused on the urgent, people focused on short-term gains rather than the long-term impact pay attention to their company or society.

Picker: Who has to be regulated here? Because there was a dual way of ESG excitement. On the one hand there are investors and on the other hand the companies themselves, who obviously advertise with their different ESG profiles. Where do you think regulation should be most effective?

Murray: I want to make a point first. I looked at this E&Y survey they conducted: 53% of the directors surveyed think ESG is a compliance issue. 21% think it is not essential. 26% see this as a strategic opportunity. And then only a third of that group of people think that the companies that publish ESG information do so in a way that is done well and accurately. If so, how many companies are reporting on ESG? And to say they are ESG compliant and they really aren’t? What’s the standard? What does it mean? So I think companies need to have broad disclosure and standards for disclosing ESG. And companies need to list what the limits of what they tell people about what they do with ESG. This can’t just be a marketing problem. Tons of money go into ESG funds. There are tons of people interested in shareholders, governments, and so on. Let’s get together and set some standards so we all know that what we see is consistent.

I think we have to start with companies and I think investors have a right to know what they are really reading right. What does it really mean? Do they really know, when you look at all the money that is put into these things? So in my opinion it has to start here. Now some people say, “Well, you know, I don’t think the government should interfere on that.” Well if they don’t I don’t see how that changes. I don’t see this being corrected by the industry or the companies themselves. So when you look at all of the money people are investing, when you look at the effects, when you are not making any real progress on climate change, or when you know wasting fuel etc how we are polluting our planet, it makes it easy for me there is no point in not having a standardized point of view. We will make mistakes at first. But for God’s sake, let’s start on the path to great disclosure, great responsibility, and great transparency, which I believe will transform.

Picker: Some critics would argue that the government, which focuses and ensures there is transparency and disclosure within American companies, as well as investors regarding the way they market things as ESG, removes them from the bigger issues distracts, regulators and government should just focus on solving things like climate change and focus on figuring out how to increase the opportunities for a diverse group of people rather than taking those actions. What would you say to that?

Murray: I think, honestly, I think it’s BS. What I mean by that is you can do both. If you want the government to solve the big problems of climate change, and DE&I, why not want them to help you report on it too? Who should do this if not the regulators? Who brings it together However, what I think Leslie is that regulators need to work closely with companies. And I don’t see this harmonization anymore … so I’m not saying to skip the deal. I’m not saying to leave the controls off. I say let’s all get together and find out together. But I don’t think for a minute that if the regulations are solely focused on climate change or DE&I, with no disclosure, no metrics, then how do we know it works? How do regulators know it’s working?

Picker: because [ESG is] so broad that it has the potential to leave behind certain efforts that were more in the foreground in the past. You know, Diversity, Equity Inclusion, for example, if a company has very good metrics in terms of its environmental footprint or governance footprint, can it sweep all diversity, equity and inclusion issues under the carpet?

Murray: My great belief is that you can do both. I mean I don’t understand why, you know, diversity, justice –

Picker: You can, but companies feel they don’t need to because –

Murray: Well, they don’t have to because they don’t have to. And that’s why I come back to this government article, this regulation article. And believe me, if you asked me 20 years ago if we have any governments or regulators dealing with diversity, I would say no, companies will do it, they will do it themselves, it’s the right thing, it is great for business. Well I was wrong. I was totally wrong.

And, and what I’ve seen is work when regulations come out and say, “You shall report the following things and it will be disclosed.” And directors will be held in trust for ensuring that it is done well, and CEOs will be held accountable through compensation. I see it really works.

Picker: So it’s about disclosure, it’s about regulation. You are a regulator. As the chairman of FINRA, you are in the seat, which supervisory authority do you think should address this?

Murray: I think the SEC has done a lot lately – first of all, I’m not speaking here as chairman of FINRA and we are responsible for the individual investor. But I think the SEC [Gary] Gensler has done a lot about what’s coming out of ESG. He’s been talking about DE&I and climate change, and he’s got people to lead those initiatives.

Ritika Shah contributed to this article