Economy and Society: July 5, 2022- SCOTUS ruling impact on SEC

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.

Did the Supreme Court throw a wrench into the SEC’s plans?

On June 30, the Supreme Court of the United States released its ruling in the case of West Virginia v EPA. Although the Court did not go as far as some observers were expecting by overturning or limiting the doctrine of Chevron deference, by which courts are expected to defer to administrative agencies in their interpretations and enforcement of statutes that are vague, it did strike a blow against agencies’ ability to regulate beyond the scope of their legislative mandates.

SCOTUS restrained the EPA and limited its powers to regulate climate change emissions under the major questions doctrine, which enjoins the agency (and, by extension, other agencies) from attempting to impose new regulatory schemes in the absence of an explicit mandate from Congress. Specifically, the Court said that the Clean Air Act of 1970 did not give the EPA the ability or the mandate to regulate C02. Therefore, neither the EPA nor other agencies not specifically charged with that task are able to undertake that task, unless Congress acts first.

According to some ESG commentators, the ruling raises questions about the Securities and Exchange Commission’s authority to demand corporate disclosure of climate change-related information. Those questions are in addition to existing others analysts have asked about the SEC’s mandate, including many that were expressed in the public comments posted in response to the SEC’s proposed rule. If under the major questions doctrine, some have argued, the EPA is not allowed to regulate C02 without a specific mandate from Congress, then the SEC’s power to do something similar could potentially be questioned. Some observers argue that the ruling will curtail the powers claimed by the SEC in its final rule, while others believe that the Commission will be challenged upon the release of that rule on the grounds that it has exceeded its regulatory authority:

“The U.S. Supreme Court‘s decision to limit the Environmental Protection Agency’s power to regulate greenhouse gas emissions has raised questions about whether the decision could impact the Securities and Exchange Commission (SEC) proposal to force companies to disclose their emissions.

Thursday’s ruling restrained the EPA’s authority to regulate power plant emissions, raising doubts about other federal agencies’ authority under the Biden Administration’s mandate to regulate companies’ greenhouse gas emissions.

That could potentially impact the SEC, which is drafting a controversial new rule requiring public companies to disclose their direct and indirect greenhouse gas emissions.

Former SEC attorney Walé Oriola, counsel at Faegre Drinker, said that “under the principle leaned on by the high court in the EPA case, the SEC should be cautious as it approaches finishing its climate disclosure rules. I think the EPA ruling would influence what requirements makes it into the final version of the rulemaking.”…

Some climate change activists and shareholder rights groups do not believe the Supreme Court ruling will derail the proposal. “We do not think yesterday’s SCOTUS rule on EPA Clean Air Act will have an impact on any court challenge to the SEC proposed rule on climate disclosure,” Andrew Behar, CEO of As You Sow, a Berkley, Calif.-based nonprofit that promotes corporate responsibility through shareholder advocacy, told Financial Advisor magazine.

“The new SEC rule that will require corporate disclosure be accurate, verified and included in the audit is the most basic requirement of good governance and commerce. It simply ensures trust between companies and their shareowners,” Behar said.

But John Pendergrass, vice president for programs and publications at the Environmental Law Institute, an independent nonprofit based out of Washington, D.C., disagreed. “Although the court’s decision in West Virginia v. EPA doesn’t directly affect the SEC climate disclosure rule, it certainly suggests the SEC, as well as every other agency, needs to emphasize the clear statutory basis for any new rule. The boundaries of the major questions doctrine are simply unclear at this time,” Pendergrass said.”

BlackRock Investment Institute chairman announced among selections for the U.S. Department of State’s Foreign Affairs Policy Board

On June 22, the Biden State Department announced its “selections for the U.S. Department of State’s Foreign Affairs Policy Board,” which is tasked with providing “independent advice on the conduct of U.S. foreign policy and diplomacy, consistent with each Secretary of State and administration’s evolving priorities for it.” Among those named was the co-chair, Tom Donilan, who is also an employee of BlackRock, the biggest player in the ESG world, and one of the people responsible for a high-profile ESG-related investment recommendation issued last year:

“The Biden administration’s pick to advise the State Department on “strategic competition” with Beijing chairs an investment think tank that urged Americans to triple their investments in China.

Secretary of State Antony Blinken on Friday selected BlackRock Investment Institute chairman and Obama administration national security adviser Tom Donilon to co-chair the Foreign Affairs Policy Board amid the State Department’s pivot to China.

Donilon’s work at BlackRock could pose a conflict of interest for the board, which provides “advice, feedback, and perspectives” to senior State Department officials on foreign policy matters. Under his leadership, the Investment Institute has urged investors to dramatically increase their stakes in Chinese companies. What’s more, BlackRock views “strategic competition” with China as bad for the company’s bottom line.

“Strategic competition between the U.S. and China and resulting tensions have also contributed to uncertainty in the geopolitical and regulatory landscapes,” reads BlackRock’s most recent annual report. The firm listed U.S.-Chinese competition as a factor that could hurt its revenue and profit. BlackRock opened a mutual fund in China in September, making it the first American firm approved to sell financial products there….

Donilon has sided with China in the debate over tariffs imposed during the Trump administration. He chided government officials in 2019 about the tariffs and inaccurately warned that they would cause a global recession.

“Future generations of Americans will judge today’s leaders harshly for squandering this moment,” Donilon wrote in an article touted by China Daily, a mouthpiece for the Chinese Communist Party….”

On Wall Street and in the private sector 

The Federalist: ESG ratings discrepancy favors China over USA

In a June 28 piece published by The Federalist, Chuck Devore, a conservative commentator and the vice president of national initiatives at the Texas Public Policy Foundation, compared ratings issued by ESG giant MSCI for American companies and those issued for Chinese companies. Devore argues that his comparison shows a discrepancy that favors Chinese companies and, in his view, betrays the spirit at the heart of the ESG movement:

“MSCI is one of the world’s largest investment support services firms, with $2.1 billion in revenue. It offers an ESG rating service. I noticed that my Charles Schwab account recently started to display MSCI’s ESG ratings alongside that of the more traditional ratings services — services focused on a company’s profitability.

Curious, I looked into the rating of a firm I own some stock in: Texas-based Brigham Minerals (NYSE: MNRL). Brigham looks for land that could produce oil and gas, and owns mineral and royalty interests in 7,909 oil wells and 688 natural gas wells in West Texas, New Mexico, Oklahoma, Colorado, Wyoming, and North Dakota. MSCI rates Brigham Minerals as a B, the sixth lowest of seven ratings that range from AAA to CCC, labeling it a “laggard” in the industry with an overall score of 2 out of 10….

I looked up three China-based energy companies and compared them to Brigham Minerals. They were Xinyi Solar Holdings (OTC: XISHY), China Resources Gas Group (OTC: CGASY), and China Coal Energy Company (OTC: CCOZF). All three beat the American energy company in their overall rating.

China Coal Energy is 58.36 percent owned by China National Coal Group, a state-owned enterprise. China Coal Energy owns 12 coal mines, 13 coal-processing plants, five coking plants, four coal mining equipment manufacturing plants, and two mine design institutes. They’re really into coal….

China Resources Gas Group mostly invests in natural gas pipelines. It’s a subsidiary of China Resources Holdings Company, a state-owned company….

MSCI generously rates China Resources Gas as an “A” — the third-best of seven grades, with better grades than Brigham in both the environment, 7.7 to 0.8, and social, 7.6 to 3.5….

Xinyi Solar Holdings should be problematic for MSCI — after all, China’s solar power industry, a global juggernaut, is a heavy user of materials produced by slave labor in Xinjiang, a Muslim-majority region formerly known as Turkestan where the Chinese communist government has been engaged in a grinding genocide. MSCI even has a corporate statement against “modern slavery” on its website, claiming that the firm “is committed to protecting human rights globally… Specifically, the Firm strongly opposes slavery and human trafficking and will not knowingly support or conduct business with any organization involved in such activities.”

This is at odds with MSCI’s ESG rating of Xinyi Solar — an “A” — with scores of 8.1 for environment (heavy metal pollution aside, apparently), 5.6 for social, and 2.6 for governance. Overall, Xinyi scores a 6.1 of 10 compared to 2 for the Texas firm.

That a firm in China that relies on slave labor for key portions of its supply chain has a better social score than an American firm that pays landowners who freely sell them their mineral rights betrays an upside-down ethic where freedom is slavery and ignorance is strength.”

Shareholders are less likely to support ESG initiatives than they were last year

For a variety of reasons​​including new SEC rules and an ongoing interest in ESGAmerican companies faced a record number of environmental and social-focused shareholder proposals during the just completed annual-meeting season. But despite the record number of proposalsor, perhaps, because of itshareholders overall were less likely to support such initiatives than they were last year:

“U.S. companies faced a record number of shareholder votes on environmental and social issues this year, but investor support was lukewarm for proposals calling for more ambitious climate targets.

Shareholder proposals called on companies to stop financing fossil fuels, reduce plastic waste and assess their positions on racial justice, among other issues, according to a review of the filings by The Wall Street Journal….

Shareholders have so far voted on a record 274 sustainability-related proposals this year, up 41% from last year, according to the Sustainable Investments Institute, a nonprofit that tracks such activities. About three dozen more votes are expected by the end of the year.

But overall support was muted. Despite the record number of proposals going to a vote, average support fell to 27% from 32% last year, the Sustainable Investments Institute said….

The drop in overall approval for ESG-related proposals partly reflects low support for a wave of new anti-ESG proposals from conservative groups, which are also included in the data, said Heidi Welsh, executive director of the Sustainable Investments Institute.

For instance, 10 votes asked companies, including AT&T Inc. and Levi Strauss & Co., to report on risks arising from efforts to tackle racial inequality. The proposal at AT&T drew the most support, with nearly 4%.

Ms. Welsh said requests that were more ambitious also contributed to the overall decline. “New proposals always get less support,” she said.

Proposals are increasingly asking companies to hit goals in specific ways, rather than merely calling for targets or disclosures. Ms. Welsh pointed to nine first-time votes calling on major U.S. banks and insurers to stop financing fossil fuels. They earned an average of 12% support, and none passed….

Mark van Baal, founder of shareholder advocacy group Follow This, which filed the resolutions, said the meager support shows concerns over energy security are trumping climate.”