SEC deprioritizes ESG enforcement

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.

Help us improve Ballotpedia and our newsletters by sharing your media preferences with us: take this short survey to give your feedback.

ESG developments this week

In Washington, D.C., and around the world

SEC deprioritizes ESG enforcement

The Securities and Exchange Commission (SEC) publicly named ESG enforcement as one of its top priorities after President Joe Biden (D) took office and has been active on the issue ever since. But the commission’s annual priorities list for 2024 did not mention ESG, indicating the SEC is shifting its compliance priorities:

The Securities and Exchange Commission is putting advisors on notice that in the coming year its examiners will be probing how firms manage conflicts of interest, how they promote their business through marketing materials, and their compensation arrangements.

It isn’t surprising that those are among many compliance areas the SEC’s Division of Examinations has outlined in its annual priorities list, a document that can be read as a compliance road map for advisors, brokers, and other registered entities subject to oversight by the commission. 

What is more notable this year is what it left off. One conspicuous absence from the 2024 priorities is any mention of how advisors handle investments tied to environmental, social, or corporate governance factors. 

In last year’s document, the commission included a section on how advisors and funds handle ESG-branded products and strategies, including “whether the funds are operating in the manner set forth in their disclosures” and whether they are “appropriately labeled and whether recommendations of such products for retail investors are made in investors’ best interest.”

Despite the shift in priorities, experts believe that the SEC will continue significant enforcement of ESG policies:

ESG might not have made this year’s list, but that doesn’t mean the issue has faded from regulators’ attention, according to Joshua Broaded, head of global regulatory compliance at ACA Group, a business consulting firm. He notes that the SEC is in the midst of two rulemakings related to ESG and climate, one regarding corporate disclosures and another involving advisor and fund disclosures, and the commission’s Enforcement Division includes a well-staffed ESG and climate task force.

“The SEC continues to focus significant effort on ESG, so the absence from the exam priorities needs to be considered in context,” Broaded says. “It’s reasonable to expect that the SEC and other regulators will continue to focus on ESG despite it not being specifically called out in the exam priorities, just as many other issues were not mentioned.”

Conservative think tank rates presidential candidates on ESG

The Heartland Institute, a conservative think tank, issued a new report rating the presidential candidates’ views on and proposals for responding to ESG:

Over the past summer, my team of researchers at The Heartland Institute investigated the ESG policy platform for nearly all of the presidential candidates, from Ron DeSantis and Donald Trump to Nikki Haley and Robert F. Kennedy, Jr. They also investigated past statements made about ESG and voting records (if available).

In cases where presidential candidates hadn’t said much about ESG, I or members of my team reached out to the candidates directly to request more information.

Once all the data was compiled, we assigned letter grades to each of the 11 candidates reviewed and are just now publishing our findings. The best grades were awarded to candidates with strongest positions on ESG.

Our highest standard for an anti-ESG platform includes support for three specific policies: (1) preventing public money (especially pensions) from being used to promote ESG causes, (2) blocking government agencies from doing or expanding business with powerful pro-ESG interests, such as Blackrock, and (3) supporting legislation to stop banks and other financial institutions from using ESG to discriminate against businesses and individual consumers. …

Although most Republican voters might expect all the GOP candidates to be fully devoted to combating ESG, we found that only four met our gold standard for an anti-ESG platform: Ron DeSantis (A+), Donald Trump (A), Mike Pence (A), and Tim Scott (A-). …

Two of the candidates in the race earned scores in the “B” range, businessman Vivek Ramaswamy (B) and North Dakota Gov. Doug Burgum (B-).

Ramaswamy’s B grade will probably be considered by most readers as our report’s biggest surprise. …

Three candidates received grades in the “C” range, Nikki Haley (C+), Asa Hutchinson (C), and Chris Christie (C-). …

The two candidates with the lowest scores are Robert F. Kennedy, Jr. (D) and President Biden (F).

European Commission considers delaying disclosure rules

The European Union passed new environmental reporting standards over the summer for companies doing business on the continent. Now, some are proposing delaying the implementation of the regulations for two more years:

Europe’s executive arm is proposing a two-year delay in implementing a key element of its sustainable finance framework, as complaints mount that businesses can’t keep up.

The European Commission said cutting red tape is critical to ensuring that the region’s companies remain competitive, according to a document laying out its agenda for 2024. That means extending the deadline for adoption of sectoral elements of the European Sustainability Reporting Standards, or ESRS, currently due to come into force in June.

“This will provide an immediate reduction in the reporting burden for in-scope companies,” small and medium-sized firms, the commission said.

The development is the latest sign of a pushback against Europe’s ambitions to swiftly respond to climate change and social inequality, and steer its economy toward a more sustainable model. An 11th-hour attempt by members of the EU’s parliament to entirely rework the ESRS failed Wednesday, in a vote of 359-261. …

Other corners of Europe’s ESG framework also are likely to be reworked. The commission is reviewing the Sustainable Finance Disclosure Regulation, its ESG investing rulebook. And this week, the EU announced it’s seeking stakeholder input as it reconsiders Europe’s taxonomy of sustainable business activities amid a steady drumbeat of complaints that companies can’t meet all the new rules within existing deadlines.

The European Financial Reporting Advisory Group (EFRAG), which develops the reporting standards, said in a report earlier this month that it’s preparing to provide guidance for the “numerous questions” it anticipates about the general sustainability reporting requirements that companies will have to comply with.

Brazil adopts international ESG standards

Brazil last week became the first country in the world to fully adopt the International Sustainability Standards Board’s global standards for sustainability disclosure:

Brazil will incorporate ISSB sustainability disclosure standards into its regulatory framework, according to an Oct. 20 announcement by the International Financial Reporting Standards Foundation.

The organization’s International Sustainability Standards Board unveiled two global sustainability disclosure standards on June 26 that let investors see how companies manage climate risks and opportunities and other sustainability issues, with information tied to corporate financial statements. …

The Brazilian Ministry of Finance and the Comissão de Valores Mobiliários said in the announcement that the ISSB standards will be voluntary beginning in 2024 but will shift to mandatory use on Jan. 1, 2026, as part of mandatory IFRS accounting standards.

Latin American jurisdictions including Chile and Columbia have been at the forefront of mandating sustainability-related financial disclosures, according to IFRS.

On Wall Street and in the private sector

Last three months saw more ESG funds close than open

American investment companies closed more ESG funds over the last three months than they opened “[f]or the first time in recent history,” according to a recent report from Morningstar. The report argued that a combination of events and circumstances have pushed some American investors to different strategies:

Money managers in the United States have closed funds with sustainability mandates faster than they opened new ones over the past three months as investor appetite waned for the asset class overall, data firm Morningstar said on Monday.

Investment products with a declared aim to promote ethically responsible practices, from cutting greenhouse gas emissions to increasing workplace diversity, have lost their lustre in the U.S. since a 2021 boom, as regulators scrutinised how they were marketed and Republican politicians alleged industries were being boycotted to the detriment of retirees’ savings.

“For the first time in recent history, sustainable fund departures outpaced arrivals” in the three months September, Chicago-based researcher Alyssa Stankiewicz wrote.

Three new funds were launched while thirteen closed in this category. One existing fund took on the “sustainable” label and four other funds moved away from that mandate. …

The slowdown came on the heels of 27 launches and 9 closures in the previous quarter, and compares with a record 44 launches in the fourth quarter of 2021.

Investors pulled money out of U.S. funds in general in the period, but sustainable funds fared worse than conventional peers, registering their fourth consecutive quarter of outflows for a contraction of 0.85% versus 0.02% for the total fund universe. More conventional funds were launched than closed in the third quarter.