The inauguration of President Obama for a second term provides an important moment to assess the nation’s level of policy effectiveness in areas of concern to investors who care about financial responsibility and sustainability as criteria for making sound investment decisions.

The fragility and volatility of the global economy -- highlighted by the collapse of major financial institutions in the United States and the loss of nearly $13 trillion of investor assets -- has shaken investor confidence since the vulnerability of large banks, investment firms and insurance companies was shown to be caused by excessive risk-taking and poor or nonexistent regulatory oversight. According to the Chicago Booth/Kellogg Financial Trust Index, 79 percent of investors have no trust in the financial system. Sixty-four percent of Americans believe, according to The 2012 Ethics and Action Survey: Voices Carry, that corporate misconduct was a significant factor in bringing about the current economic crisis.

Four years ago, the receptivity of the President’s transition team to these issues gave reason for hope among sustainable and responsible investors that systemic financial reforms would be put into place and that the business risks associated with climate change would be viewed as material to the financial bottom line. But financial institutions (and the power they wield over Congress) has delayed the implementation of important financial reform laws and regulations since 2009.

Let’s check on the progress of the path to reform:

The Securities and Exchange Commission (SEC)

Although the lack of regulatory oversight was partially responsible for the Great Recession of this generation, Congress continues to fail to provide the SEC with the budget and staff necessary to monitor, investigate and hold accountable those individuals and institutions that put the American people at risk through negligence or abuse. Unfortunately, the SEC only has 10 examiners for every trillion dollars in investment advisor assets under management (it was 19 back in 2005).

Its $1.3 billion annual budget and 5100 staff must oversee:

• 10,000 investment advisers
• 9,700 funds
• 4,500 broker-dealers with more than 160,000 branch offices
• 9,100 reporting companies’ disclosures and financial statements
• 450 transfer agents
• 5 national securities exchanges
• 8 active clearing agencies
• 9 nationally recognized statistical rating organizations
• The Public Company Accounting Oversight Board
• The Financial Industry Regulatory Authority
• The Municipal Securities Rulemaking Board
• The Securities Investor Protection Corporation. 

By comparison, the FDIC has a $2.7 billion budget and over 8,000 employees to monitor, as well as 7,700 financial institutions, which reflects how the SEC is severely under-resourced.

And then came the Dodd-Frank legislation.

Next page:  More about the SEC

The rulemaking related to the Dodd-Frank Wall Street Financial Reform and Consumer Protection Act continues to be upheld by the sheer volume of rules to be drafted as well as lawsuit threats from the U.S. Chamber of Commerce and other business groups. Success has been achieved on several fronts:

• a proxy access rule gives shareholders the right to nominate directors to corporate boards and have those nominees appear in the proxy statements that publicly-traded companies must send to all shareholders;
• the SEC no longer automatically issues “no action” letters omitting shareholder proposals that ask management to undertake a risk assessment or review the financial implications of environmental, social and governance (ESG) issues, meaning the SEC now considers ESG issues as material to financial performance;
• publicly traded companies now must disclose their use of minerals sourced from “conflict” nations as well as disclose any payments made by resource extraction companies to other governments; and
• an SEC Investor Advisory Committee was established to allow investors to provide direct input on existing and proposed regulations. The related Office of Investor Advocate is expected to be created soon.

Other SEC policy priorities currently in progress include:

• disclosure by publicly traded companies of ESG-related risks, a long sought-after requirement that would inform investors of non-financial factors that can affect financial performance and therefore shareholder value;

• disclosure of corporate political contributions, which are a potential reputational risk since most people believe that the democratic and accountable functioning of society is compromised when access to decision makers and the policy making process favors corporate interests; and   
• disclosure of executive compensation in relation to that of average employees (a pay disparity issue of great concern), particularly considering the high unemployment rate and the trend of shipping jobs overseas.

Next page:  Other factors

Financial reform

• The Consumer Financial Protection Bureau was created and funded with strong protections for citizens in areas of mortgage and credit card fee disclosure; and
• Increased federal support for Community Development Financial Institutions (CDFIs) was garnered, including extension of the New Markets Tax Credit.

Environment and climate change

• The sustainable, responsible and impact investment industry believes the strong authority and funding levels of the Environmental Protection Agency is necessary to require business to adequately respond to climate change, which is a direct threat to profitability and the U.S. economy, among others; and
• The EPA’s Utility Mercury and Air Toxic Standard must be enforced to reduce harmful emissions and provide incentives for power producers to explore renewable sources of energy to power the grid.

Photo of the New York Stock Exchange provided by SeanPavonePhoto via Shutterstock.