Economy and Society: SEC disclosure rule continues to attract attention

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.

Panel highlights potential concerns with SEC disclosure rule

Last week, the Bipartisan Policy Center hosted an event discussing the proposed SEC sustainability disclosure rule for public companies and its likely implications. Some observersin this case, the Competitive Enterprise Institute’s Senior Fellow Richard Morrisonwere surprised at how earnestly the matter was discussed, and how honestly the panelists discussed potential problems with the rule:

“The BPC’s Tim Doyle and former SEC Commissioner Troy Paredes discussed the substance of the rule and the concerns many agency observers have already begun to voice about it.

While I was expecting a very middle-of-the-road tone to BPC’s event that basically assumed the legitimacy of the rule, I was pleasantly surprised to hear both Doyle and Paredes highlight some significant concerns with it. The participants didn’t necessarily agree with all of these potential objections, but the fact they flagged them as reasonable concerns was reassuring….[H]ere are a few potential red flags that caught my attention:

  • The SEC may not have the statutory authority to enact this rule in the first place.
  • Enacting affirmative climate policy and expanding corporate disclosure to benefit investors are two different things; the SEC may inappropriately be trying to do both.
  • The agency’s itself admits that it has been “unable to reliably quantify” the cost-benefit impact of the rule.
  • The proposal suggests that basing new regulations on existing voluntary frameworks will reduce burdens, but they underestimate the costs and risks of moving from partial voluntary compliance to legally mandated disclosure.
  • The comment period (60 days) may be too short to properly evaluate a rule with such sweeping implications.
  • The rule moves from a “principles-based” approach to disclosure to a more prescriptive approach that is out of step with the SEC’s usual procedures.
  • Disclosing “scope 3” greenhouse gas emissions is vague and problematic; the promised “safe harbor” from fraud liability may be much less valuable that advertised.

These concerns are similar to the major issues that SEC Commissioner Hester Peirce flagged when she delivered her sternly worded dissent from the Commission’s majority vote to move forward with the proposal….

[F]ormer Commissioner Paredes reassured cynical listeners that the SEC does, in fact, take regulatory comment letters seriously and encouraged the audience to participate in the proceeding. You have until May 20 to do so.”

Senator Joe Manchin (D) argues rule will harm energy industry

Meanwhile, West Virginia Senator Joe Manchin (D) wrote a letter to the SEC Chairman Gary Gensler expressing his unease with the proposed rule, which he argues will harm the energy industry. Politico reported:

“In a letter Monday to SEC Chair Gary Gensler, Manchin questioned the need for the measures released for public comment last month. The West Virginia Democrat suggested that making firms measure and track greenhouse gas emissions could chill investment in fossil fuel businesses while imposing costs on all affected companies.

“[T]he proposed rule has the potential to run counter to the SEC’s long-standing commitment to its mission by adding undue burdens on companies, while simultaneously sending a signal of opposition to the all-of-the-above energy policy that is critical to our country right now,” wrote Manchin, who leads the Senate’s Energy and Natural Resources Committee….

Manchin’s criticism comes on the heels of his opposition to Sarah Bloom Raskin, President Joe Biden’s one-time pick to lead the Federal Reserve’s Wall Street oversight. Manchin effectively killed Raskin’s nomination over concerns about her calls for the financial system to insulate itself against climate change-driven shocks. He raised similar concerns in his critique of the SEC’s proposal.

“The most concerning piece of the proposed rule is what appears to be the targeting of our nation’s fossil fuel companies,” Manchin wrote. “Not only will these companies face heightened reporting requirements on account of their operations, but they will also be subjected to additional scrutiny for the Scope 3 emission disclosures of other companies that utilize their services and products.”…

Manchin claimed the rule would “seemingly politicize a process aimed at assessing the financial health and compliance of a public company.””

The SEC is not, however, a one-hit ESG wonder

In a piece published last Thursday, April 7, The National Law Review suggested that those who expect the SEC’s ESG efforts this year to be limited to its new disclosure rule haven’t, in their view, been paying attention. The SEC has additional plans as well:

“As part of the focus on ESG investment issues, the SEC made clear that it will scrutinize disclosures by registered investment advisors (“RIA”) that advertise ESG strategies or that allege that they take into consideration ESG criteria. The goal of the SEC’s efforts is to ensure that false, inaccurate or misleading statements are not made to the public about investment options. The SEC recognized that due to the current lack of uniformity in ESG investment metrics or factors, there is risk to investors due to firms using a wide array of ESG measuring techniques….

The SEC indicated that its focus in 2022 will be to ensure that RIAs are “(1) accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices; (2) voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; or (3) overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”

The SEC’s examination priorities will place a heightened level of scrutiny on RIAs, many of which already use ESG statements in their marketing of investments.”

On Wall Street and in the private sector

Financial Times: “Punishing start to the year for ESG investment”

On April 8, The Financial Times carried a long piece noting the poor performance of ESG investments this calendar year, and also that many investors are not interested in what they see as a tired and poorly supported investment play:

“Reports are starting to show it was a punishing start to the year for the environmental, social and governance (ESG) investment sector. Cash into ESG funds fell to $75bn, the lowest level since the third quarter of 2020, according to a report published by the Institute of International Finance on Thursday. The inflows in March, $15bn, were at their weakest since March 2020. The paltry sum stemmed from concern about technology stocks, which were heavily favoured by ESG funds, the IIF said. And higher oil prices tempted investors to shelve their eco-enthusiasm for energy stocks.

The figures again raise the question: Did ESG peak in the first quarter of 2021?…

As questions around energy security take the main stage, there are whispers over whether ESG will be “cancelled”. And they’re coming from former ESG advocates themselves.

After 11 years in the world of pension funds, Anne Simpson entered the private capital world in January as Franklin Templeton’s global head of sustainability. Since then, she’s been beating a new drum: RIP to ESG.

“This marks the end of looking at financial markets through ESG,” Simpson said on Tuesday at a private capital conference in New York. “We cannot capture the true risks of what’s going on simply by this cute little acronym that has gotten popular.”

Privately, other ESG proponents have also begun to groan that the language of the financial movement has become mere fluff — and that Simpson is just taking on the mantle as spokesperson. They say it’s time to get serious, forget the acronyms, the myriad task forces and the soggy alphabet soup that the ESG world has become stuck in over the past years….

A realistic, just transition is going to require some trade-offs — a point that many are keen to dismiss, Simpson said. But, short-term trade-offs are needed to uphold investors’ long-term duty to stakeholders….

As even ESG’s backers start to turn on their own industry, many are wondering what the future of corporate sustainability will look like — especially in the face of a global crisis. Industry veterans have started to shout the answer: drop the aesthetics of ESG and start answering the hard questions.”

In the spotlight

CEOs, incentives, and ESG metrics

As has been noted occasionally in this section of this newsletter, one of the most significant management trends of the past several years is the move to ESG-based payment incentives. In Canada, the United States, and various spots in Europe, more and more companies are rewarding CEOs not for profits or stock performance but for meeting various ESG criteria in their management of the business. On April 11, The Irish Times reported that the trend has taken hold in Ireland as well:

“Three-quarters of top 20 companies on the Irish stock market are now linking executive bonuses in some way to environment, social and governance (ESG) targets, as international investors increasingly demand that publicly-quoted groups adopt these non-financial goals as part of remuneration packages.

The move, from an almost standstill position two years ago, has been accelerated in the latest slew of annual reports in recent months, as companies prepare to hold in-person annual general meetings (agms) for the first time since the onset of the Covid-19 pandemic….

Building materials giant CRH, whose chief executive Albert Manifold received an Iseq-record remuneration of €13.9 million last year, said in its annual report that it is proposing that 15 per cent of awards under its executive performance share programme for 2022 be tied to ESG targets. These include measures on driving the company towards carbon neutrality, inclusion and diversity and revenue from products “with enhanced sustainable attributes”.

Paddy Power owner Flutter said it included “extremely challenging” safer gambling targets for two of its four divisions in its management bonus plans last year and will widen these out to all divisions in 2022. The company is also “actively considering” using remuneration to “support and incentivise our wider ESG agenda”.

A fifth of Kerry Group’s executive long-term incentive plan since last year was tied to the company achieving milestones against its targets of reducing carbon emissions by 55 per cent and food waste by 50 per cent by the end of the decade….

European companies are ahead of US peers in terms of climate-related financial disclosures.

A quarter of US companies included some form of ESG metric as part of their executive incentives last year, according to Glass Lewis, a proxy advisory company that makes recommendations to institutional investors on corporate governance matters and agm votes.”