ESG can be viewed as a set of signals that a good analyst would have looked for anyway. Except that the current reporting model under-serves such a diligent analyst.

Here are my opening remarks at the Congressional hearing on June 6, 2023 on ESG.

June 5, 2023

House Oversight Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs and Subcommittee on Health Care and Financial Services

Re: Testimony related to ESG

Thank you to Subcommittee Chairs Fallon and McClain, Subcommittee Ranking Members Porter and Bush, as well as the other members of the Committee for the opportunity to testify before you today on a topic of utmost importance – how companies allocate resources, who are they accountable to and how.

It is an honor to be here. My name is Shiva Rajgopal, and I am the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School.

To me, ESG is really about material factors that affect the future cash flows and cost of capital of a firm. I think of ESG as a term that covers data that is not adequately disclosed by our financial reporting model and mandated disclosure rules. Let us consider specific examples to illustrate this argument:

ESG, in essence, is a free market, organic and an investor driven movement to ask firms to disclose more information about the described factors associated with their future cash flows or cost of capital. Investors would be derelict of their fiduciary responsibility to their stakeholders if they did not consider the material factors when making an investment decision. Prohibiting consideration of material ESG factors simply interferes with the provision of data to make asset markets efficient at pricing these risks and returns. In fact, there is evidence to suggest that substantial losses will be incurred by the constituents of the states such as Texas where legislation that infringes on the public pension fund’s freedom to invest have been passed in recent months.[7]

In closing, I would reiterate that investors and asset managers cannot afford to ignore financial risks posed by overlooking material ESG data relevant to understand the future cash flows and risks of stocks, bonds and other assets.

Thanks again for listening to my testimony. I look forward to answering your questions.

Yours sincerely

Shiva Rajgopal

[1] https://www.bloomberg.com/news/articles/2023-06-03/a-global-stock-trader-s-guide-to-more-extreme-weather-events?sref=yv2coi81

[2] https://www.sec.gov/rules/petitions/2022/petn4-787.pdf

[3] https://www.forbes.com/sites/shivaramrajgopal/2022/12/21/why-investors-need-better-corporate-tax-disclosurespart-i/?sh=5b201873653f

[4] https://www.forbes.com/sites/shivaramrajgopal/2022/12/24/why-investors-need-better-corporate-tax-disclosurespart-ii/?sh=61128ae4694f

[5] https://www.forbes.com/sites/shivaramrajgopal/2021/06/07/it-should-be-mandatory-to-disclose-political-influence-seeking-and-payoffs-from-the-state-theres-an-evidence-based-reason-why/?sh=30a208d11eb3

[6] https://www.forbes.com/sites/shivaramrajgopal/2022/10/23/most-us-companies-pay-ceos-under-a-competitive-pay-policy-but-dont-confuse-it-for-pay-with-performance/?sh=758c58757a19

[7] https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/texas-fought-against-esg-heres-what-it-cost/June 5, 2023