Nasdaq Rules To Create More ESG Data for Funds

IgniteslogoA new rule will make companies listed on the Nasdaq exchange more attractive for investors and fund managers who focus on environmental, socialBostonTtrustWaldenTimSmithand governance investments, analysts said.

The rule, which received Securities and Exchange Commission approval late last week, would require that most companies listed on the exchange disclose diversity data about their boards. They must also each have one corporate

director who self-identifies as a woman, and one member of an underrepresented minority or who self-identifies as lesbian, gay, bisexual, transgender or queer. If a company does not have two such directors, they must disclose why not.

 Companies must comply with the rule by either Aug. 6, 2022, or when it files its fiscal 2021 annual proxy statement or annual report.

“Companies that are subject to this rule look better for asset managers that are selecting investments on the basis of diversity criteria,” said Jackie Cook, director of sustainability stewardship research for Morningstar. “It normalizes diversity. Boards have not moved towards diversity in a pace that’s been commensurate with investor expectations and societal expectations.”

Without regulatory action, it would take a “long, long time” for corporate boards to have an equal number of men and women, she added.

Women occupy 23.1% of board positions in the U.S., according to FactSet data published in February.

Nearly 75% of fund firm executives are men and about 84% are white, according to an Investment Company Institute study published in February.

Some 42% of industry employees are women and 32% are nonwhite, according to the ICI analysis.

The Nasdaq rule, unlike a bill currently in the House that has support from the ICI and Sifma, does not require that companies disclose the demographics of prospective board members. Nor does it require firmwide diversity data, as another House bill does.

In addition, the rule also does not apply to boards of ETFs or closed-end funds that trade on Nasdaq.

The new rule will give mutual funds with an ESG mandate in corporate governance fuller and more reliable data, said Heidi Welsh, founding executive director of Sustainable Investments Institute.

“The good thing about regulation is you can compare apples to apples,” Welsh said. Current, voluntary disclosures are not consistent, and can be even more challenging when assessing “squishy” data like social or demographic identity, she added.

Nearly 60% of asset managers believe that a lack of data impedes their ability to implement ESG investing principles, according to a July report from the Index Industry Association.

More data will improve rulemaking around ESG, SEC Commissioner Caroline Crenshaw said in May.

The Nasdaq rule will provide a baseline for what will be expected in board diversity, Morningstar’s Cook said. Therefore, impact funds will not seek out firms that are minimally compliant with the rule.

However, if an investor or asset management firm wants to invest in holdings with better ESG data, the Nasdaq rule may tilt them to invest in a Nasdaq-listed firm, said Charlotte Laurent-Ottomane, executive director of the Thirty Percent Coalition, an advocacy organization.

“If the company is already on your radar and this is an additional element, then yes, I think it would move them toward it,” she said.

The rule is just a first step, Laurent-Ottomane said. Board diversity is merely one factor among many, and it therefore might not lead to an immediate uptick in funds investing in Nasdaq-listed companies.

“It’s an important data point, but it’s one,” Sustainable Investments Institute’s Welsh noted.

However, investors in ESG funds manufactured by shops that trade on the Nasdaq will demand that firms comply with the Nasdaq rule, Cook said, and not simply disclose why they don’t.

“There’s a lot of scrutiny of how they walk the walk, particularly on diversity,” she said. “I don’t think these rules create new pressure. I think the pressure’s already been on these companies to create diversity.”

Rob Sharps, who will become T. Rowe Price’s CEO on Jan. 1, has publicly promised to prioritize impact investing. The Baltimore-based shop, which is traded on the Nasdaq, has six female or diverse corporate directors, according to a company spokesperson. In all, the firm has 11 board members.

However, both Republican SEC commissioners opposed the Nasdaq rule.

Commissioner Hester Peirce slammed it, arguing that it does not meet the purpose of the Exchange Act. The rule does not protect investors, harms markets and is contrary to the public interest, she argued.

In enforcing the rule, the SEC may be forced to assess the validity of someone’s demographic affiliation, Peirce said, a violation of the principles of the U.S. Constitution.

Because ethnicity, race and sexual orientation are not legally required to be disclosed, the Nasdaq rule raises some privacy concerns, said Andy Behar, CEO of As You Sow, a shareholder advocacy firm.30PC LogoMobileMember “The intent is great and I’m sure they are going to work out the details,” he said. But some of the disclosure requirements are new, which means that there will be “a lot of privacy issues that I think need to be dealt with,” he added.

In addition, the SEC is subordinating demographic identity to knowledge, expertise and experience, Sen. Pat Toomey (R-Pa.) wrote in a press release.

“These prescriptive requirements may ultimately harm economic growth and investors by pressuring companies to select directors from a narrower pool of candidates and discouraging others from going public,” he wrote. “I’m disappointed Chairman Gensler is turning a financial regulator into a laboratory for progressive social engineering.”

The SEC is considering its own rule that would mandate that corporate boards disclose their diversity information about members and nominees, the SEC’s midyear agenda shows.

And if the new rule leads to more investments in Nasdaq-listed firms, other exchanges will likely follow suit, As You Sow’s Behar said. “I think you’re going to start to see money flow in that direction, and you’re going to see others say, ‘We got to catch up,’” he added.

...we find that banks with more gender diversity on their board perform better once the composition of these boards reaches a critical level of gender diversity, corresponding to a board female share of around 13-17 percent.

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