The Securities and Exchange Commission (SEC) recently proposed a new disclosure rule called “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” The proposed rule would require public companies to disclose their climate-related risks to investors. The reporting framework is the first significant step toward making environmental, social, and governmental (ESG) reporting a regulatory requirement.
Twenty-three state financial officers sent a letter to the SEC outlining concerns with the proposed rule. The State Financial Officers Foundation (SFOF) led the effort on behalf of its members and identified eight specific problems with the proposed rule:
- The SEC is not a climate regulator, and this rule lies outside the scope of the SEC’s responsibilities.
- This proposed rule violates the First Amendment because it will force company leadership to speak extensively about their impacts on climate change, even if they disagree with the assessment of climate risks.
- The proposed rule does not consider impacts on everyday Americans investing in an unstable economic environment.
- This proposed rule would be extremely costly for issuers because they would need to account for climate risks throughout their supply chain, and there is no apparent benefit to these increased costs.
- The proposed rule indulges in climate exceptionalism elevating climate concerns above pertinent economic risks.
- It fails to consider relying on the EPA’s existing greenhouse gas (GHG) emissions registry, which already requires disclosures for environmental issues.
- A justification for this proposed rule is comparable data, but it fails to provide a method to enable comparisons across issuers.
- The decision to require additional disclosures has been prejudged by the SEC Acting Chair, who has not allowed the proposed rule to have fair and full consideration.
“It is disheartening but not surprising to see activist behavior from the SEC as it continues to promote rules and policies which prioritize polarizing political agendas over fiduciary duties to investors and issuers,” SFOF Chief Executive Officer Derek Kreifels said. “This proposed rule is well out of the scope of SEC’s authority, and we highly encourage them to address our concerns about using ESG as a political weapon against consumers.” He added that the SFOF is not seeking a “conservative” fund manager. It wants funds managed from a neutral perspective for the benefit of the investors.
“This administration has been hell-bent on pushing a green agenda through multiple agencies, not just the SEC, since January of 2021,” Kreifels continued. “Biden has appointed people to positions across the government, not just within the SEC, with the sole purpose of using them to pursue an ideological agenda.” According to Kreifels, these weaponized government agencies are working in concert with activist organizations and fund managers, like Larry Fink from BlackRock, to pressure publicly held companies to implement a political agenda that won’t pass through the legislative process.
Fund managers and corporate boards have a fiduciary responsibility to the investor. They are playing with other people’s money and should focus on the financial well-being of those individuals. Elon Musk’s bid to buy Twitter is a recent example of this concept in action. Because Musk’s offer exceeded the current market value, Twitter’s board could not refuse it for purely ideological reasons without risking lawsuits. So far this year, ignoring investments in oil and gas would deprive investors of income, and these investments are a safe bet for millions of Americans, according to Kreifels. Fund managers ignoring them to pursue green ends could be held liable.
But the SEC’s push to incorporate ESGs does not end with calculating climate impact. That is only part of the “E.” “Ultimately, ESGs will encompass everything the Left can’t get done through the legislative process,” Kreifels warned. And it is already happening. With the leak of the draft decision that indicated the Supreme Court might overturn Roe v. Wade, activist investment advisors sprang into action.
Three different investment groups put forth shareholder proposals at Walmart, Lowe’s, and T.J. Maxx’s parent companies that would force the companies to provide access to abortions for their employees in states where the procedure is restricted or outlawed. International Shareholder Services, a decidedly left-leaning provider of “corporate governance and responsible investment solutions,” is advising Walmart and Lowe’s shareholders to vote for the proposals to address some undefined “likelihood that the company’s female workforce will be impacted.” Lowe’s, Walmart, and TJX recommend shareholders reject the proposals.
It makes sense that large retailers may not want to weigh in on divisive political issues that could offend large groups of customers. However, as long as ESGs get pushed through the regulatory agencies, activist investors, and small groups of vocal employees, the pressure on companies to embrace left-wing political positions will remain. But the SFOF and other Republican politicians at the state level are trying to push corporations back to neutrality on social issues. Florida Gov.Ron DeSantis publicly took on Disney when the corporation declared they would wade into education issues in the state.
Another first in combating ESGs recently came out of Kentucky. “Kentucky State Treasurer Allison Ball requested an opinion from the Attorney General regarding whether ‘stakeholder capitalism’ and Environmental, Social, and Governance (ESG) investment practices in connection with the investment of public pension funds are consistent with Kentucky law governing fiduciary duties,” the state reported on its website in May. According to Ball, a body of law in the state requires state pension board members to manage state pension funds in a way that focuses on profit, solvency, and improving the state’s industrial development and economic health.
Cameron agreed. “The pensions of Kentucky’s public employees should not be subject to ‘ESG’ investment practices that allow political decision-making to trump sound financial decisions. We issued an opinion today finding that ESG practices are inconsistent with state law.” The AG’s opinion will govern the investment actions of the state board and open the door for lawsuits against investment firms that utilize ESG criteria. It also provides a roadmap for other states and groups of participants in state pensions whose state representatives do not take action to enforce fund managers’ fiduciary responsibility.