Economy and Society: Shareholder group study argues ESG fund labels misleading

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.

ESG advocacy group releases its recommendations for federal regulatory action

Ceres, one of the largest nonprofit groups advocating for capital markets to take an active role in urging businesses to be what it deems more environmentally conscious, released its list of recommendations for federal agencies. The organization noted that the members of its investor networkto whom Ceres offers investment direction and guidance on climate change and other mattershave some $32 trillion in assets under management. Roll Call provided the details:

“Ceres last week publicly disclosed its recommendations to the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the U.S. Treasury Department, calling on the regulators to incorporate climate risk into their rule-making and policy frameworks….

Ceres urged the Fed to issue supervision letters on climate risk to banks and bank holding companies to acknowledge that climate change poses risks to the financial system and provide guidance to financial institutions on identifying and monitoring the risks. The group also calls on the U.S. central bank to review the largest bank holding companies to gain an understanding of how they are identifying and managing climate risk and coordinate a study with the OCC and FDIC, as well as New York and Massachusetts’ state financial regulators.

“These recommendations build on that momentum by identifying practical and familiar steps that these agencies can take within their existing authorities to make good on their commitments to take action on climate financial risk,” said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets.

Federal Reserve Chairman Jerome Powell told the Senate Banking Committee this week that it is “very likely” that the agency will use “climate stress scenarios” to ensure financial institutions understand the potential material risks from global warming. 

That said, Ceres stressed the need for the agencies to work together and pursue interagency initiatives to optimize the regulatory response to climate change. 

“Short-term actions by each of the Financial Stability Oversight Council members individually is critical to address the risks to the financial system from climate change,” the organization said. 

“While individual agency actions are important, collective action can sometimes send a more powerful and consistent message to the financial services industry. The benefits from the government acting on a joint or interagency basis are clear. Such joint actions avoid conflicting or duplicative messages which create burden for industry and they can result in a more efficient allocation of resources by the agencies.””

Shareholder advocacy group’s ESG study reveals ESG fund labels confusing, misleading 

As You Sow, a nonprofit organization that aims, according to its website, to “promote environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies,” recently shared with the Securities and Exchange Commission (SEC) a study that it sponsored and that purportedly shows that the ESG landscape at present is confusing, misleading, and in need of federal regulatory action. According to Bloomberg Green:

“Investing in ESG funds is like trying to navigate “the Wild West” as both regulations and enforcement fall short, according to Andrew Behar, the chief executive of As You Sow.

The shareholder advocacy group spearheaded a study that found 60 of 94 ESG funds failed to adhere closely to the principles of environmental, social and governance investing. The findings, which have been shared with the U.S. Securities and Exchange Commission, indicate that “one can’t tell the difference between a prospectus for true ESG offerings vs. greenwashing mutual funds and ETFs,” the nonprofit said Tuesday.

The researchers — a group of graduate students from University of California, San Diego — used data-analytic tools to establish that language in many funds’ prospectuses lacked clarity when disclosing why they held stakes in companies involved in areas such as fossil fuels, deforestation, firearms and weapons, prisons and tobacco. 

“We see funds with ESG in their names getting F’s on our screening tools because they hold dozens of fossil-fuel extraction companies and coal-fired utilities,” Behar said….

Representatives from As You Sow met with the SEC last week to share their analysis and make recommendations. The SEC has previously said it’s investigating potential misconduct related to flawed sustainability claims….

As You Sow wants the SEC to require that all prospectuses be produced in a “machine-readable” format to enable easy automated comparisons of the documents’ wording. If the regulator fails to do so, “we may be forced to file a petition,” Behar said.”

SEC in Texas probes banks over disclosures on ESG-related issues

According to a report published by Reuters on January 5, the Fort Worth, Texas office of the SEC is currently investigating disclosures made by banks in the state regarding their ESG policies. The banks in question do business with the Texas state government, which has laws on the books forbidding state entities from using banks that adhere too closely to ESG principles. According to the report, the Commission is looking for discrepancies between public statements and faithful compliance with state laws. As the wire reported: 

“The inquiry appears to relate to two Texas laws, enacted last year, banning state entities from working with companies that discriminate against firearms or fossil fuel companies, the sources said.

Amid pressure from investors and employees, banks have become active on environmental, social, and governance (ESG) issues, eschewing gunmakers, backing racial equity projects and pledging to phase out fossil fuel lending, sparking a backlash from Republican lawmakers who worry sectors of the economy may lose access to credit.

The SEC’s new Democratic leadership, meanwhile, has pledged to crack down on public companies that may be inflating their ESG credentials to attract investors and burnish their reputation, or which may be underplaying related risks.

In recent weeks, enforcement staff in the SEC’s Fort Worth, Texas, office sent letters to a number of banks that have acted as underwriters in the Republican-led state, asking them to substantiate ESG policies they have outlined in public disclosures, the same people said.

The SEC seems to be scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies, the sources said….

Lenders who want to underwrite offerings of securities issued by Texas state and local governments have had to sign public certifications saying they do not “boycott” energy companies or have a practice, policy, or directive that discriminates against a firearm entity or firearm trade association.

Thirty-six companies have filed such certifications, according to the Municipal Advisory Council of Texas, a trade association which compiles and publishes the documents.

Among them are Barclays (BARC.L), Citigroup Inc (C.N), RBC Capital Markets (RY.TO), TD Securities (TD.TO), UBS Financial Services (UBSG.S) and Wells Fargo, according to certifications filed between September and November.

These lenders have pledged to cut their carbon footprints and achieve net zero greenhouse gas emissions by 2050, which will affect the companies they finance.”

On Wall Street and in the private sector

Survey shows Americans think workers, not climate, the number one ESG issue 

Just Capital, a nonprofit advocacy group that aims to influence capital markets, recently released the results of a survey it conducted assessing the issues that the American people think are in most desperate need of fixing in business. According to the advocacy group, the issue that most concerns peopleand that thus deserves a higher place in the ESG hierarchy of issuesis not climate change or zero-carbon transitioning, but the worker. CNBC reported the survey as follows:

“In the annual ranking of top U.S. companies on ESG metrics conducted by research nonprofit Just Capital, there were some major moves in 2022, both up and down the list. Meta Platforms dropped 691 spots due to concerns about spread of misinformation on Facebook and Instagram’s negative social influence, while Uber Technologies rose 825 places, to No. 41. Both were unusual circumstances, but Uber’s ranking may say more about the most important issue to the American public when it comes to environmental, social and governance issues: treatment of workers.

It is the No. 1 issue, but that’s not revealed in the fact that Uber vaulted into the JUST 100 — it’s because Just Capital took the unusual step of denying Uber the “seal” that the top 100 companies usually get.

Uber, along with Lyft and DoorDash — though neither made the top 100 overall like Uber — were placed “under review” by the ESG research firm in this year’s rankings because the data does not capture the fact that a significant proportion of their workforce is classified as independent contractors….

Martin Whittaker, CEO of Just Capital, says when the firm sets out to create the annual list of America’s “most just” companies, it wants to get it “as right as you can,” and it’s not confident that ESG is there yet with the contingent workforce model.

“When you have a whole business model built around contingent workers it’s hard to get data,” Whittaker said. “The full-time employees I’m sure are paid very well and get great benefits. And you get data on that. But we know its whole business model is based on a different relationship with workers, and we didn’t feel like we had enough data to accurately reflect that story. It’s the same for Doordash and Lyft,” he said. “We felt like it is an emerging systemic story and we didn’t feel like we really had a sufficiently strong handle on what it meant and how to measure it.”

Just Capital knows for sure that workers are the No. 1 ESG issue to the American public because each year it polls the public to create the weightings for its annual ranking, and for 2022′s list, worker issues were weighted at nearly 40%, compared to 10% for climate. A fair, living wage was the No. 1 issue overall. The second-highest weighted area, Communities (20%), is partially a workforce metric because it includes job creation.”

In the spotlight

Crypto vs. ESG, again

A longstanding perceived battle between supporters of cryptocurrencies and advocates of ESG and sustainability has erupted in fighting once again, this time on the battlefield of Wikipedia. At present, Wikipedia accepts donations made in a handful of cryptocurrencies, most notably, Bitcoin. Because of the energy used in the cryptocurrency mining process, some ESG advocates consider cryptocurrency, in their view, environmentally damaging. As a result, Wikipedia, which has promised to be environmentally sustainable, is being pressured by its own contributors to stop accepting crypto donations:

“Wikipedia is facing increasing internal pressure to stop accepting crypto donations. The site which was launched in 2001 has grown throughout the years to become the number 1 encyclopedia site on the internet, all the while remaining a free resource for anyone with access to the internet, and the reason it has been able to do this was because it relies on donations.

Wikipedia currently accepts donations in a number of cryptocurrencies, which began in 2014, but as these digital assets have grown and come under increased scrutiny due to its environmental impacts, there have been calls for it to discontinue crypto donations which “may not align with the foundation’s commitment to environmental sustainability.”…

The impact of bitcoin and other crypto mining on the environment remains a big debate to this day. It is estimated that crypto mining is the 33rd largest consumer of power in the world, ahead of a lot of countries. This has caused the rally against mining activities that are said to be damaging to the environment….

The proposal…calls into question the proof-of-work mechanism utilized by bitcoin and other cryptocurrencies which is a computationally expensive process and Wikipedia accepting crypto donations adds to the environmental burden levied by these transactions.

[The] proposal has sparked discussions across the Wiki community. Some have cosigned the message being passed by the contributor, although the debates around crypto donations continue.”