When most think of a business’s value, they consider “tangible assets”—money, land, equipment. But a growing trend has been to value a company or organization based on “intangible assets”—reputation, employees, and customer loyalty. ESG is a method of valuing “intangible assets” of a business.
What is ESG?
ESG is a method of investing and analysis of a business’s value based on an organization’s commitment to three values or non-financial categories: Environmental, Social, and Governance (ESG).
Environmental (E) – This category focuses on the size of a company’s impact on the environment and how it manages that impact. Even if a company is nature-dependent (think using significant amounts of water or timber), the goal for this category is efficiency.
Social (S) – Social covers a broad swath of issues, from employees to customers and communities. This category is best thought of as a company’s reputation – how it treats and values its employees and customers.
Governance (G) – This is the administrative aspects of a company. Is it transparent? Is its accounting on the up-and-up? Do its owners and managers effectively communicate?
Why is NFIB tracking federal agency action on ESG?
While ESG may sound good, there are practical implications that could be costly for small business. Additionally, ESG presents some concerns about agency overreach.
NFIB Action on ESG
The Securities and Exchange Commission (SEC) issued a Notice of Proposed Rulemaking last summer seeking to require that entities disclose their ESG investment practices. NFIB submitted a comment letter opposing this rule and advocating for America’s small businesses. Our comment letter requested:
- That the SEC withdraw its proposed rule entirely, as it places an unnecessary burden on the free market.
- If the SEC pushes forward with the rulemaking, it exempt Small Registered Investment Advisers from the ESG disclosure requirements. We proposed language defining Small Registered Investment Advisers as follows:
- An entity with management assets less than $25 million;
- Had total assets of $5 million on the last day of the most recent fiscal year; and
- Does not control, is not controlled by, or does not share common control with an entity not meeting the above two criteria.
- Instead of just using the vague terms “Environmental,” “Social,” and “Governance” along with a list of synonyms, the agency must actually define these terms in the final rule.
NFIB has engaged in several other ESG-related federal actions:
The first was a Notice of Rulemaking from the Department of Defense and General Services Administration that would require government contractors to conduct annual inventory and reporting of their greenhouse gas emissions as well as their climate-related financial risks. Our comment letter urged the agencies to withdraw the rule, arguing that they lacked legal authority. In the alternative, we asked them to create an exception for small businesses.
The second was a Notice of Rulemaking from the SEC that would enhance and standardize climate-related disclosures for investors. Our comment letter urged the SEC to ensure the impact of its rule does not extend to small and independent businesses by requiring SEC-regulated companies to obtain climate-related information from non-SEC-regulated companies.
NFIB also recently supported S.J. Res. 8, a Congressional Review Act resolution disapproving of a Department of Labor final rule regarding ESG for investment decisions. In our letter of support, we noted that “ESG policies politicize and distort investment decisions and the allocation of capital necessary for small business growth.”
NFIB will continue to monitor federal ESG activity to ensure that the government considers both the direct and indirect impact of ESG-related rules on small business.
Additional ESG Resources
From the Breakroom to the Boardroom: ESG and the Life Sciences Industry – Jackson Lewis
ESG Integration and Small Business – CPA Journal
Please reach out to the NFIB Small Business Legal Center with any questions [email protected].
