Economy and Society: Academic pushback against SEC climate action


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.

Academic pushback against SEC climate action 

On April 25, 22 law and finance professors submitted a comment letter to the Securities and Exchange Commission (SEC), questioning the Commission’s proposed climate-change disclosure rule. Professor Lawrence A. Cunningham of George Washington University issued a press release detailing the professors’ motivation and chief complaints. The letter began as follows:

“The enthusiasm of many Commissioners and Staff of the Securities and Exchange Commission (the “SEC”) to participate in the global debate about climate change is understandable. After all, protecting the earth’s sustainability is perhaps the most compelling issue of our time. It’s an issue all must take seriously and everyone must do their part. But each of us, and particularly governmental authorities, must always act in accordance with law and fairness.

The undersigned, a group of professors of law and finance, are concerned that the SEC’s recent proposal to impose extensive mandatory climate-related disclosure rules on public companies (the “Proposal”) exceeds the SEC’s authority. In addition, rather than provide “investor protection,” the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models.”

The letter continued, explaining in detail three lines of argument that the group of professors believes demonstrate that the SEC is, in their view, exceeding its authority:

“The following analysis raises concerns that the Proposal is neither necessary nor appropriate for either investor protection or the public interest and will not promote other statutory goals. The SEC would do better to withdraw the Proposal and revisit the subject with a fresh approach focused on America’s ordinary investors rather than an elite global subset. The three parts of this letter address each statutory issue in turn, as follows:

I. “Investor Demand” versus “Investor Protection”

A. Investor Varieties: Diverse Institutions and Individuals

B. Climate Shareholder Proposals: Few Are Made, Most Lose, Many Are Political

C. The Ample Supply of Climate Disclosure

D. Correlation of Climate Practices with Economic Performance Is Not Causation

II. Authority of Others and the “Public Interest”

A. The Environmental Protection Agency’s Statutory Jurisdiction

B. State Corporate Law Prerogatives on Purposes, Powers and Business Judgments

C. Risk of Unconstitutional Compelled Political Speech

III. Other Statutory Considerations

A. Certain High Costs versus Highly Speculative Benefits

B. Impairs Investment Industry Competition

C. Compliance Burdens Discourage Public Company Registrations”

Finally, the professors concluded:

“We respectfully urge the SEC to withdraw the Proposal. We are concerned that the passions of this topic have led the SEC to overzealous rulemaking that exceeds its authority. Governments, above all, must adhere to the rule of law, especially when officials believe honestly and fervently in a specific agenda. The federal securities laws focus on investor protection generally, while the Proposal prioritizes the demands of a subset of the global investment industry. We encourage the SEC to focus on all American investors, not just the most vocal and activist voices.”

State-level ESG pushback gains supporters in Congress

For much of the year, state-level government officials in states including Texas, Florida, and West Virginia have led political opposition to ESG and related investment issues. Last week (as detailed in our last issue) elected officials from Utah responded critically to an ESG rating applied to them by S&P Global. According to Roll Call, some Republican members of Congress have been inspired by state-level action to get involved in an effort against ESG themselves:

“Republican state lawmakers are berating U.S. financial institutions for increased reliance on environmental, social and governance metrics to screen investments and analyze credit risk factors, with some of the critics attracting support in Congress.

Utah state Treasurer Marlo Oaks coordinated a response to S&P Global Inc., blasting the financial services firm’s credit rating division for plans to supplement its analysis of states with a score on certain ESG indicators, such as exposure to climate risk and demographic trends….

Notably, Oaks was joined by Gov. Spencer J. Cox, other state officials, and Utah’s entire congressional delegation: Republican Sens. Mitt Romney and Mike Lee and Reps. John Curtis, Blake D. Moore, Burgess Owens and Chris Stewart.

Stewart said he and his colleagues are encouraging other GOP members to have similar conversations with their state treasurers and financial regulators on the proliferation of ESG metrics.

If Republicans take back control of the House at the midterm elections, they will look to utilize appropriation riders to curb additional ESG regulations. This would be akin to the long-standing rider that prevents the Securities and Exchange Commission from pursuing rulemaking on corporate political spending disclosure, he said in an interview Tuesday.

“We’re going to be able to put some limits on this, precluding the Securities and Exchange Commission, for example, from using their regulatory authority to implement policies that are really out of bounds of their actual authority,” said Stewart, who sits on the House Appropriations Committee. “We’ll have some ability to push back on that starting next winter.”

The letter and Stewart’s remarks underscore the latest effort from Republican politicians who are pushing back against the financial sector’s embrace of ESG metrics in credit analysis and investment decisions.”

In the States

West Virginia joins opposition to S&P ESG indicators

Last week, West Virginia Treasurer Riley Moorewho has waded into the ESG debate beforefollowed his Utah counterpart, Treasure Marlo Oaks, in opposing S&P Global’s new state ESG ratings and calling for them to be scrapped. According to Bloomberg:

“West Virginia’s Republican treasurer called on S&P Global Ratings to scrap a new system scoring U.S. states on their environmental, social and governance efforts, calling the ratings scale a “politically subjective” scheme that will force states to yield to “woke capitalists.”

“This new ESG rating system is just the beginning of a new wave of judging states – and their people – not by valid financial metrics, but by the preferred political views and outcomes of a select global elite,” West Virginia State Treasurer Riley Moore said in a statement released earlier this week. “The ESG movement is nothing but a slippery slope whereby our states and our people will be forced to bend the knee to the woke capitalists or suffer financial harm.”

S&P’s new system scores governments on categories like human rights, social integration, low-carbon strategies, climate measures and sustainable finance. The company released its first scorecard March 31.

S&P declined to comment.

West Virginia, a Republican-controlled state, received a negative social score and a moderately negative environmental score. The vast majority of states’ ratings were neutral. West Virginia has an AA- bond rating from S&P, its fourth-highest.

“So despite our state’s excellent financial position, our taxpayers could now be punished with higher borrowing costs simply because S&P doesn’t like our state’s industries and demographic profile,” Moore said. “This ratings scheme will affect our state and its municipalities, and begs the question: at what point will this stop? Will individuals soon get ESG ratings as part of their credit scores? Where will it end?””

On Wall Street and in the private sector

Declining ESG demand in Europe 

For several years, supporters of ESGincluding those in various government agencieshave pointed to the continually rising inflows into ESG funds as evidence that investment strategy is popular with average investors as well as the large asset managers who promote ESG as part of their broader business strategy. This year, however, that argument has become more difficult to make, as ESG demand has dropped among European investors, according to a story in The Financial Times:

“Flows into exchange traded funds that are focused on better environmental, social and governance (ESG) outcomes amounted to €13bn in the first quarter, less than half of the €27bn that went into them in Q4 2021, Morningstar data for Europe show.

Just 30.4 per cent of total money put into ETFs in Europe in Q1 went into ESG funds, down from the 79 per cent record high in Q4 last year.

Thematic ETFs, like ESG portfolios and other funds that also tend to come with a quality growth bias, have seen demand shrink amid the disastrous performance of recent months. Flows into these types of funds amounted to €0.6bn in Q1 2022, down from €2.1bn in the previous quarter.

Morningstar observes that this was the first quarter since 2019 in which thematic ETFs failed to attract at least €1bn of net inflows.”

In the spotlight

Bonuses tied to ESG performance continue in popularity

Another American company has announced that it has joined a trend previously most popular in Europe and Canada of rewarding executives based on their achievement of ESG-related, rather than purely pecuniary goals. This time, it’s Wendy’s:

“Wendy’s will tie executive compensation to environmental, social and governance performance and is also working to target reductions across Scope 1, 2, and 3 emissions, according to its 2021 corporate responsibility report.

Additionally, the fast-food company reported its 2020 climate data to the CDP for the first time in 2021. Wendy’s is continuing to move toward sustainable packaging and move away from hard-to-recycle single use products, according to the report.

The company’s board of directors made the decision to begin tying executives’ 2022 incentive compensation linked to the company’s achievements with its Food, People and Footprint goals. The company says it believes the move will drive more progress toward achieving its ESG goals.

Wendy’s compensation plan is similar to restaurant chain Chipotle, which is also tying up to 15% of its executives’ annual incentives to ESG progress….

In 2021 Wendy’s says it reduced water usage by 25% in its US restaurants and facilities compared with a 2018 baseline. The company also exclusively grew tomatoes and lettuce in greenhouses last year, which resulted in using 90% less water, and sourced coffee which met standards for protecting natural areas and waterways.”