Economy and Society: SEC disclosure rules meet resistance

The Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In Washington, D.C.

SEC disclosure rules meet resistance from potential ESG allies

The Biden administration has dedicated attention and resources to administrative efforts to monitor and, where possible, increase the federal government’s involvement in ESG matters.  Its recent creation of a new, senior position at the SEC for ESG and climate policy and the immediate review and intended repeal of a Trump administration rule on fiduciary responsibilities are two of the administration’s early actions in this area.

According to a recent Politico story, however, the administration’s plans face resistance from  potential private sector ESG allies. On February 8, Politico reported the following:

“Democrats are vowing to go through the Securities and Exchange Commission to impose sweeping financial disclosure rules on climate risk that would force thousands of businesses including banks, manufacturers and energy producers to divulge information to investors. Lenders are set to get even more scrutiny from their own regulators like the Federal Reserve, including potential stress tests to measure their resiliency to rising sea levels and extreme weather.”

Politico quotes BlackRock’s Larry Fink, however, arguing the following:

…many publicly traded companies — those accustomed to sharing information widely with investors — are on track to manage their climate risk amid growing market pressure. He says the government should focus on privately held firms that are taking on more carbon-intensive businesses but don’t divulge as many details of their operations. Companies that start disclosing information should get temporary legal protections to shield them if they misreport data, Fink says.

We’re going to see a vast change in the public company arena worldwide,” he said at a Brookings Institution event Tuesday. “They are going to move forward. We’re not going to need really governmental change or regulatory change.”

On Wall Street and in the private sector   

Data from 2020 show continued ESG growth

According to CNBC and Morningstar, inflows to U.S. ESG investment funds in 2020 were more than $51 billion, “a record and more than double the prior year.” Additionally, in 2020, ESG funds captured more than a quarter of all funds invested by Americans over the year, up from just 1% in 2014.

Elsewhere, Bloomberg Green reported that global sales of ESG bonds and other ESG investments also continued to set new records. In a February 10 article, Bloomberg’s Tim Quinson reported that:

“Governments, corporations and other groups raised a record $490 billion last year selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows.”

Bloomberg Green also reported that Wall Street giant Goldman Sachs has, for the first time, begun selling ESG bonds, following other big banks into the new and lucrative business line:

“Goldman Sachs Group Inc. sold bonds aimed at financing environmentally and socially conscious projects for the first time, joining other Wall Street banks tapping the fast-growing market.

The New York-based lender issued $800 million in sustainable bonds after the offering was upped by $50 million amid strong investor demand, according to a person with knowledge of the matter….

Goldman Sachs plans to use proceeds from the sale to fund or refinance a combination of loans and investments made in projects and assets that meet its green and social eligibility criteria, according to the firm’s sustainability issuance framework. That includes priorities such as clean energy, sustainable transport and financial inclusion.”

ESG becomes a new target for SPACs

Last week, Europe’s first ESG SPAC, ESG Core Investments BV, held its IPO, successfully raising its target 250 million Euros, and rising in subsequent trading. SPACsa Special Purpose Acquisition Companyare companies that exist exclusively to find and acquire existing businesses or business opportunities. SPACs have no prior operations and raise funds to pursue purchases and/or takeovers of businesses that fit its investment criteria. 

Meanwhile, in the United States, former NFL quarterback Colin Kaepernick announced that he, in partnership with Jahm Najafi, a partial owner of the Phoenix Suns, had filed to use an SPAC to raise $250 million in pursuit of an ESG-related company. 

Moving from E to S and G

In his annual letter, published last month, Cyrus Taraporevala, the President and CEO of State Street Global Advisors, one of the world’s largest asset managers, advised clients and companies that his firm would focus on social and governance issues this year, in addition to the environment. Up to this point, most of the energy behind ESG matters has focused on energy and environmental issuesthe “E” in ESGincluding the transition from fossil fuels to what are deemed by proponents sustainable energy sources. In his letter, he announced the following updates:

“The preponderance of evidence demonstrates clearly and unequivocally that racial and ethnic inequity is a systemic risk that threatens lives, companies, communities, and our economy — and is material to long-term sustainable returns. … 

To build on our previous guidance — and to ensure companies are forthcoming about the racial and ethnic composition of their boards and workforces — we are instituting the following proxy voting practices, which are outlined in our new Guidance on Enhancing Racial and Ethnic Diversity Disclosure:

* In 2021, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards;

* In 2022, we will vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses; and 

* In 2022, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least 1 director from an underrepresented community on their boards.”

Scholarship and research

Updating the balanced scorecard for ESG

Writing in the Harvard Business Review, Robert S. Kaplana senior fellow and the Marvin Bower Professor of Leadership Development, Emeritus, at Harvard Business Schoolupdated the balanced scorecard theory (BSC) that he and his co-authors, George Serafeim and Eduardo Tugendhat, introduced in 2018. The scorecard, as they explained it three years ago, “illustrated how companies can join with other firms, non-profits, and communities in positive-sum networks that create economic value while simultaneously addressing poverty, social exclusion, and environmental degradation.” In order to accomplish these goals, the authors noted, a company had to develop a second bottom-line, which could “overcome the limitations of their accounting and control systems that prioritize only financial outcomes.”

This year, Kaplan and his new co-author, David McMillan, argued that their theory should be updated to include a third bottom line, to accommodate companies pursuing “strategies encompassing economic, environmental and societal performance.” They wrote that, “[b]y evolving the Balanced Scorecard and Strategy Map’s perspectives to reflect today’s expanded role for business in society,” Kaplan and McMillan wrote, “we believe that the BSC will help businesses focus and deliver on society’s expanded expectations for sustainable and inclusive economic growth.

In the spotlight

Tesla’s bitcoin investment 

Tesla’s recent $1.5 billion investment in Bitcoin might delay its ability to join the S&P 500 ESG Index, according to a story in Investors Chronicle. According to the report, 

“While Tesla stands out in part due to its credentials as a leader in the clean energy revolution, the bitcoin mining process is extremely energy-intensive and notoriously bad for the environment. Recent best guess estimates from the University of Cambridge suggested that bitcoin used more than 120 terawatt hours a year. For context, that would mean it consumes nearly as much energy as Norway. If Tesla’s bitcoin stash looks minuscule in the context of the company’s roughly $800bn market capitalisation, this still seems problematic.” … “It may well be issues like this, and broader governance concerns, helping to keep the carmaker out of most ESG funds.”