The future of ESG – integrating environmental, social and governance factors in investing – appears to hinge on the concept of “materiality.”

Securities and financial regulators in the U.S. are debating whether and how to guide the disclosure of information relating to corporate ESG activities. European regulators have already taken action, providing guidance through the EU Non-financial Reporting Directive and the Sustainable Finance Disclosure Regulation, among a number of other rules. For the U.S. SEC, if they are to mandate disclosure of certain corporate activities relating to ESG, an analysis of whether those items are “material” to a reasonable investor has become the analytical lynchpin.

Yet, the definition of materiality is and always has been slippery. Current law appears to require, at a minimum, that companies shall disclose all matters, including ESG matters, that are material to a reasonable investor. What constitutes “material,” “reasonable,” and even at times “investor” isn’t always clear.

Regulators are important to the durability of ESG as an investment strategy because mandatory rules or guidance can help mitigate greenwashing, pushing companies to ensure that their communications, reports, and other formalized disclosures accurately reflect their actual business practices and strategies. Moreover, investors will be able to access comparable data about the intangibles in business, sometimes called non-financial behavior, which will help them differentiate among companies’ abilities to manage these emerging risks.

What’s at stake is whether advocates for ESG can provide a defensible rationale for why activities or decisions that used to be considered externalities in business are indeed issues that companies should be responsible for in their own operations. These externalities include environmental issues like greenhouse gas emissions, as well as labor rights and fair wages, among a host of other topics. Many of these areas are not directly regulated on the substance, and therefore securities regulation could impose duties above and beyond existing laws.

Employee satisfaction is a good example in this context. While historically companies considered it nice to have satisfied employees – a happy worker can be a harder worker – labor was primarily viewed as fungible and secondary to other strategic assets. Companies today, however, increasingly view employee retention as a key priority. Even before the pandemic’s impact on tight labor markets, competition for qualified workers was on the rise. Thus, the salient question for corporate disclosure is whether employee satisfaction and retention are “material” to business operations, as has been demonstrated by academic research.

Despite evidence of the link between employee satisfaction and company performance, when it comes to human capital disclosures, few companies disclose meaningful information to satisfy investor needs. Some will cite practices such as their employee surveys or corporate values statements about respect and compassion. But this hasn’t satisfied investors, who continue to ask for more specificity. The information they seek is arguably not so onerous. The Human Capital Management Coalition, a cooperative effort led by a number of investors and asset managers, has boiled it down to four foundational reporting elements, such as the total number of employees (including independent contractors), employee turnover/retention rate, the total cost of the workforce, and diversity data.

Among the SEC Commissioners who have recently opined on materiality, Commissioner Pierce has made the point that there isn’t a need for additional SEC rules on this topic. She indicates that “if ESG opportunities are driving management decision-making, our existing disclosure rules also pull those in.” Others, such as past Commissioner Roisman have also indicated his view that materiality should be the “touchstone” for additional disclosure guidance from the SEC, but questions whether the market is mature enough for SEC guidance to meaningfully address needs beyond the information already available.

This view, that material ESG information from corporate issuers is already mandated, seems to be accurate in principle. For example, Regulation S-K requires that the company disclose its sources of raw materials, its competitive position, or pending legal proceedings, other than routine litigation. Additionally, the 2010 SEC Guidance Regarding Disclosure Relating to Climate Change should have helped address some gaps relating to whether and how environmental and climate matters are material risks for investors.

Commissioner Lee, however, believes that it’s a myth that the securities law imposes a spontaneous obligation on companies to disclose all ESG matters, or indeed all general matters material to investors. She advocates that the market needs guidance relating to ESG matters such as climate change and human capital management because “there is no general requirement under the securities laws to reveal all material information.” Moreover, even when there is a duty to disclose a specific item, business managers and their lawyers and auditors must judge what rises to the definition of materiality. Thus, further guidance on these emerging risks is warranted.

The Department of Labor (DOL) proposals on ERISA plan fiduciary’s responsibilities with respect to ESG also suggests that there is a lack of clarity among market participants. The October 2021 DOL proposed regulations state the Department’s view that “in many instances … an evaluation of the economic effects of climate change on the particular investment or investment course of action” is required. This could be interpreted as a requirement that the impact of climate change on all plan assets be calculated and considered. The DOL has made it clear that use of plan assets to further political and social causes is prohibited, thus requiring that any analysis be limited to financially material impact.

Even if there were consensus that mandatory disclosure of material ESG risks is warranted, the concept of materiality can prove elusive. The prevailing SEC definition, which has endured since a U.S. Supreme Court decision from the 1970s, is more of a general principle rather than a specific requirement. The principle is that managers should disclose information if there is “a substantial likelihood” that it “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Moreover, there are emerging qualifiers around materiality today, such as economic materiality, qualitative materiality, double materiality, and dynamic materiality. Some, like economic materiality, assess impact of a matter on the company’s financial situation, while double materiality considers effects both on the company as well as on people and the planet. The latter concept of double materiality has been embedded into the EU Non-financial Reporting Directive, which established principles for reporting of corporate sustainability information in Europe. In addition, ESG is an umbrella for a number of disparate issues ranging from human rights to labor rights to climate change, not all of which can be consistently boiled down to quantitative and material risk.

What’s clear is that investors seek more decision-useful information that could serve as leading indicators of whether a management team has a good grip on the uncertain future ahead. Whether those environmental and social challenges can be refracted through the lens of materiality remains on the U.S. regulatory agenda for the time being.

While the strides I mentioned above are significant, there’s another question we need to be asking in board rooms across America: "Is our culture changing in tandem with our efforts?" Without a resounding "Yes," we’re  at risk of reverting over time to the status quo.

It's natural to want to celebrate progress, yet we need to be realistic about the stages of organizational transformation. Actual change takes months and often years. After all, DEI programs are not new; they date back to the 1960s, when workplace diversity training first emerged. And here we are, 60 years later, still just beginning to address race and gender leadership inequities in corporate America.

Triggering events spur new visions, yet converting fully to a new reality often falls short. Only through applying many lenses to our efforts, dedicating resources, and setting measurable goals can we reinforce and sustain meaningful change.

As we approach a new year, reflect on the past, and forge ahead with our DEI planning, I hope you will evaluate your own efforts in terms of actual cultural change. Were recent appointments of people of color and women made in tandem with developing new programs and pathways for continued leadership advancement, or were they long-overdue promotions given as a reactionary response to social unrest? What new DEI goals exist for your organization in 2022? How will you measure success and stay accountable for continued cultural change?

The College remains committed to helping drive transformational change in the financial services industry through research and program development. We look forward to another year of profound progress with those organizations committed to creating sustainably diverse, equitable, and inclusive cultures.

However, my gratitude is a companion to grief. Grief over the loss of life and destruction of so many places engrained deep in childhood memories across the western part of the state. As I've explored these emotions over the past several days, I've learned that when gratitude accompanies grief, we have the resilience to overcome life's unexpected misfortunes. It is in the crossing of gratitude and grief where compassion lives.

Francis Well, a well-known author and psychotherapist, has said, "The work of the mature person is to carry grief in one hand and gratitude in the other and to be stretched large by them. How much sorrow can I hold? That's how much gratitude I can give. If I carry only grief, I'll bend toward cynicism and despair. If I have only gratitude, I'll become saccharine and won't develop much compassion for other people's suffering. Grief keeps the heart fluid and soft, which helps make compassion possible."

As stories from the survivors continue to emerge, gratitude is pervasive. If you watch the interviews of people standing in front of their destroyed homes, you'll hear, "I'm lucky I'm still alive" or "Thank God, I was not home when the tree went through my house."

The texts from my niece are the same, filled with gratitude even at not having power restored until all the missing people in her neighborhood were found. "I just wanted to let everyone know my power is restored. I can come back home, but I want to say, God knows what's best for us all! He knew "mentally" I couldn't come home every day riding past the area where people were still missing. The last little girl was found yesterday near the creek by my house. I don't always understand his ways, but I have to trust HIM!"

As Bowling Green and other communities contend with what they have lost over the days, weeks and months ahead, grief balanced with gratitude will sustain them and enable them to look ahead to the future.

My intense feelings of gratitude extend to you this holiday season. I wish you a healthy, happy, and safe holiday with those you hold dear! Thank you for your continued support of The College, our mission, and our vision.

Here is a link to the Team Western Kentucky Tornado Relief Fund for those looking for a way to help those impacted by the tornadoes. 

Our call to action remains to deliver relevant programming and thought leadership on which financial professionals can build and maintain trust with their clients.

And as a new day approaches, we will guide an industry forward to create new and lasting relationships with communities too long left underserved for the benefit of all society.

Watch my two-minute video eagerly anticipating the opportunities and possibilities ahead.

Happy New Year! 

Dr. King relied on his mentors to help him identify opportunities for growth in his strategy and guidance in advancing the civil rights movement. One of them was Ralph Bunche, an American political scientist, diplomat, and the first African American to receive the Nobel Peace Prize for arranging a cease-fire between Israelis and Arabs in the Palestine conflict. Bunche advised Dr. King to work hard toward actionable steps, avoid being too critical and always in the public's eye, and welcome disparate views before making a final decision.

Different times may call for different measures. Bunche's advice to Dr. King to "lay low" may not be what he would advise today, yet his wisdom was invaluable and based on his experience in Washington. Having the advice of those who have gone before is critical in navigating unknown territory.

For Black mid-level executives, the unknown territory is the senior level of financial services organizations. The ability to be introduced to and build connections with senior executives is significant to those pursuing career advancement. Yet how do you advance if you cannot connect with those who have successfully gone before?

Implicit racial bias embedded deep within organizations has too often obstructed the ability for Black professionals to gain access to the highest levels within organizations. Black executives have not benefited from advocates vouching for their value, contributions, and promise, nor have they been able to form the relationships needed to glean insights for maneuvering organizational politics. Both serve as catalysts for promotion–and this is where mentorship shows its limits.

Mentorship is needed for advice; sponsorship is needed for advancement. Sponsors invest much deeper in relationships with their proteges by consistently guiding their professional development and advocating for their success.

In March, the Center for Economic Empowerment and Equality will conduct its first Black Executive Leadership Program, with a primary purpose of advocating for the success of the mid-level executives who will make up the program's fellows. The program's success relies heavily on a commitment from senior-level executives, serving as sponsors, to assist in the fellows' professional development and advocate for their advancement. The program helps build long-lasting relationships that will work to advance Black professionals and expand the perspectives of senior-level executives.

I look forward to sharing more about the Black Executive Leadership Program in the months ahead. Together, we can turn Dr. King’s dream of social and economic justice for Black Americans into reality.

Like many challenges facing society, a silver bullet solution to remedy America’s lack of financial knowledge doesn’t exist. Instead, a multi-pronged approach deployed on multiple fronts is needed to tackle the issue. As the preeminent leader in applied financial knowledge and education, The American College of Financial Services has always been committed to benefiting the financial well-being of society.

Since 1927, we’ve recognized that knowledgeable professionals best serve the public’s financial security. Today, we also acknowledge that consumers need increased financial knowledge to pursue advanced expertise and the services and products required for financial stability and wealth building.

In 2021, the American College Center for Economic Empowerment and Equality started executing a bold plan to close the wealth gap for all underserved communities, including Black, Hispanic, Asian and those living in rural America. The Center’s progress with Four Steps Forward has been steadfast. We’ve conducted critical research and developed innovative programs, including Know Yourself, Grow Your Wealth, an e-learning consumer financial education and empowerment program distributed in partnership with the Society for Financial Education and Professional Development, Inc. (SFE&PD).

As we continue to progress in our work, I’d like to share five critical considerations to help inform and shape other initiatives focused on increasing the financial well-being of Americans.

1. Economic Well-Being Requires Trust

Improving the financial well-being of underserved communities requires growth in financial knowledge and TRUST. Focusing on increasing financial knowledge without addressing distrust in financial services will only continue the cycle of poor financial engagement, which is necessary for increased financial stability and wealth building.

2. Evidence-Based versus Idea-Based Solution Development

There is no shortage of good ideas formed based on goodwill. Yet, good intentions are not enough to create lasting change. Research must inform solution development, ensuring the development of practical and effective solutions.

Before the financial services industry devises the services and products to connect with new demographics, they must first understand the needs and wants of these communities and where gaps exist.

The Center for Economic Empowerment and Equality released the Black Women, Trust, and Financial Services study in 2021 to inform the financial services industry of what is needed to build an advisory relationship with Black women. Research across The College continues to focus on delivering critical data for evidence-based solution development.

3. Education Rooted in Cultural Relevance and Context

America is a vast tapestry of cultures that shape our unique experiences and perspectives. For financial education to be relevant, it needs to be applied through a cultural lens, valuing the strength in difference and layered in context to bring greater meaning to students. Know Yourself, Grow Your Wealth was developed by applying the culturally specific lens of Black America and layered in context for young earners, those about to embark on their careers, and who want to learn how to make better financial decisions.

4. “That’s Me!” in Financial Services

Have you seen the videos of the young children watching some of the more recent Disney movies, turning to their parents, proclaiming, “That’s me!” Well, “That’s me!” is also needed in financial services. As people grow in financial knowledge and seek additional expertise, they will look to identify with those who best understand their wants, needs, and concerns—those who see the world through the same cultural lens they do. Increased representation in financial services will increase financial stability for all Americans.

5. Casting a Wider Net through Partnership

Your distribution model dictates demand for any new product, service, or solution. In January, Know Yourself Grow Your Wealth, developed in partnership with SFE&PD, launched at over twenty HBCUs with seventy student ambassadors who have completed the program and are actively enrolling participants on college campuses.

Know Yourself Grow Your Wealth continues to attract the interest of corporate sponsors looking to grow in diversity, along with colleges and universities eager for a solution to address the need for increased financial education on their campuses and in their communities. As we continue to develop much-needed consumer financial education programs, partnerships are critical to cast a wider net.

I invite you to learn more about Know Yourself, Grow Your Wealth and look forward to sharing updates as the Center for Economic Empowerment and Equality progresses in its work to increase financial literacy in underserved communities across the country.

Research on ethical decision-making is often closely tied to gender. Some studies have concluded that women act more ethically than men in various business situations, including negotiating and recognizing unethical behavior. Research has also told us that when women are appointed to top management positions, there is a change in strategic approach from mergers and acquisitions to research and development, and organizations become more accepting of change.

The American College of Financial Services is committed to advancing women and ethical, evidence-based decision-making in financial services. Our Center for Women in Financial Services, led by Executive Director Hilary Fiorella, and our Cary M. Maguire Center for Ethics in Financial Services, led by Executive Director Azish Filabi, are delivering critical research to inform the financial services industry on how to better connect with consumers and build trust with all communities.

Join us as we honor the women in research at The College, working to deliver the insights needed to cultivate clarity and shape the future of financial services. These women include Domarina Oshana, PhD, Director of Research and Operations for the American College Center for Ethics in Financial Services, Timi Joy Jorgensen, PhD, Assistant Professor and Director of Financial Education and Well-Being, Kaylee Ranck, Research Director of The American College Center for Women in Financial Services, Martha Fulk, PhD, researcher, educator, and financial planner, Sophia Duffy, PhD, CPA, Associate Vice President of Curriculum Quality and Associate Professor of Business Planning, and Chia-Li Chen, PhD, Associate Provost, Graduate Programs.

I invite you to learn more about The College's women in research, their areas of focus, and how the insights they are gleaning are serving to change the face of financial services.

On March 5, 2022, we had the privilege of presenting at the National Council of Insurance Legislators (NCOIL) Spring Meeting relating to the challenges of regulating artificial intelligence (AI)-enabled underwriting for life insurance. There’s been an increase in the use of AI in various insurance processes, including marketing, risk classification, and underwriting. As we’ve written before, these developments can create new opportunities for the industry, including increased access and improving pricing for consumers. However, they also create risks—particularly with respect to discrimination.

NCOIL is an organization comprised of legislators serving on state insurance and financial institutions committees around the U.S. In addition to serving as an educational forum for policymakers and the public on these topics, they write model laws on emerging topics from which States can benefit. We presented to the Financial Services and Multi-Lines Issues Committee, presided over by Vice-Chair Jim Dunnigan—a member of the Utah House of Representatives.

Our presentation was based on a paper we recently published in the NAIC Journal of Insurance Regulation, AI-Enabled Underwriting Brings New Challenges for Life Insurance: Policy and Regulatory Considerations. Based on our research, we proposed in the paper a multi-pronged governance approach to address the novel data sources, systems, and related risks of AI-driven insurance systems.

The first prong is to establish industry standards (derived from actuarial best practices) that are calibrated to the algorithm risks associated with the process. For instance, these standards could address accuracy in the data, the level of actuarial significance expected for data input, and related outcomes measures for how an algorithm performs. Prongs two and three of the governance framework require testing of the algorithm vis-à-vis the standards created. We believe the algorithm should be tested thoroughly, and that it should be certified to adhere to the agreed-upon standards before it is deployed. After it has been in use for a period of time, it should again be tested to determine whether it performed as expected.

A number of States have already addressed AI-enabled underwriting in insurance. Colorado passed an act in 2021 mandating that the state’s Insurance Commissioner establish rules requiring insurers to demonstrate technology, such as algorithms and predictive models, don’t unfairly discriminate based on race, color, national or ethnic origin, or a number of other protected categories. In Rhode Island, the state’s House of Representatives is considering a similar law that prohibits unfair discrimination in insurance processes when using external data sources or predictive modeling and algorithms.  

The New York Department of Financial Services also addressed this topic in 2019 through a Circular Letter that expressly prohibited using criteria for underwriting purposes unless the insurer can establish the approach is not unfairly discriminatory pursuant to existing rules.

Our presentation was one of several sessions related to the impact of technology and related regulation on the insurance industry, demonstrating NCOIL’s commitment to lead regulatory efforts in this area. We are proud to have been a part of the discussion and look forward to continuing our work.

We continue to make significant strides, with many made recently, following America's reawakening to social and economic injustice, including:

• One-third of newly appointed independent directors to corporate boards in 2021 were Black - three times the number of new Black directors appointed in 2020 - as reported by the U.S. Spencer Stuart Board Index.
• The College's creation of the Center for Economic Empowerment and Equality with a plan, the Four Steps Forward initiative, to narrow the wealth gap and promote economic justice with lasting collective, community-focused solutions.
• Our Black Women, Trust, and the Financial Services Industry study that delivers evidence-based data for the financial services industry to better understand Black women's perception of financial services, their financial wants and needs, and the role they play as decision-makers in their households and communities.

Yet as we recognize our progress, we also acknowledge that the depths of Black history in financial services remain shallow from doors bolted shut for over 150 years to Black Americans. The numbers tell the story.

• According to Financial Times research released last year, Black representation among senior financial services positions barely held ground for over a decade at 2.62%.
• Less than 6% of financial advisors are African American.
• Additionally, while Black people represent 13% of Americans, there have only been 19 Black CEOs of Fortune 500 companies since 1955, representing less than 1%.

There is so much more work that needs to be done.

This month, The College celebrates today's Black pioneers in financial services: the Black innovators, leaders, and change-makers transforming the financial services industry and creating a new tomorrow for Black America - for all Americans.

Our list includes Sharon Bowen, the first Black woman to chair the New York Stock Exchange Board; Mellody Hobson, Chair of Starbucks Corporation and Co-CEO and President of Ariel Investments; and Thasunda Brown Duckett, President and CEO of TIAA. I invite you to join me in this celebration by learning more about some of today's Black history-makers here.

Together, let's celebrate Black History in the making!