Beware of the attack on America’s ESG regime
It may be a year late but the Securities and Exchange Commission’s (SEC) proposals to require US firms to provide information on climate risks facing their businesses and how those risks will be addressed, as well as data on their operational climate footprint, appear to be a couple of months from entering into force.
The complexity of these proposed rules has been a key cause of the delay. SEC chairman Gary Gensler noted recently that almost 15,000 comments have been received by the Commission.
Some key reporting requirements have faced scrutiny—for example, on climate representing over 1% of a financial statement line item and on emissions in a company’s value chains beyond its direct control.
These rules are critical to establishing clear market definitions of what constitutes “green” or “ESG-compliant” investments without which companies are freer to make misleading or fraudulent ESG claims similar to those alleged by the SEC against BYN Melon and Vale.
The SEC has meanwhile revealed that environmental, social and governance (ESG) investing will be a key focus in its Division of Examinations this year. This coupled with related rulemaking is a sign of a political commitment to address corporate indulges in ‘greenwashing’ or misleading reporting.
Though in recent weeks there have been efforts to halt this momentum. This may be aligned with efforts against the Biden Administration’s measures to encourage the purchase of electric vehicles and energy-saving appliances which would speed up, or at least maintain, the pace of transition to a low carbon economy.
A series of bills aimed at reigning in the use of ESG factors as part of the investment process are slated for introduction this summer. Florida Governor and potential presidential candidate, Ron DeSantis has proposed complimentary legislation to stop the use of ESG consideration when issuing municipal bonds, stating at a February press conference that:
“We’re also finally going to make sure that ESG is not infecting other decisions at both the state and local government.”
This is an egregious attack on investment management strategies that include ESG consideration. It could affect $220 billion of just one state’s pension funds and an incredible economic tool used to tackle conflict and serious human rights and environmental abuses occurring domestically and abroad.
These moves seem to be a political miscalculation while evidence suggests that they are out of step with the American public and investors.
A December 2022 survey of registered voters and 18 congressional offices conducted by Penn State’s Center for the Business of Sustainability and communications firm ROKK Solutions, found that 76% of voters, across political lines, agreed that companies should be held accountable to make a positive impact on the communities in which they operate.
The sustainability campaign organization, Ceres, analyzed the comment letters of 320 institutional investors, including both asset owners and asset managers, and found that they were overwhelmingly in favor of the SEC’s disclosure rules.
Even so, the counter-offensive could quickly add a new layer of politicization to the debate. This is an urgent reminder of the pushback against environment and social standards that may well gain its own momentum ahead of the 2024 election cycle.