State attorneys general appeal challenge to labor department’s ESG rule

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., and around the world

Will SEC Names Rule clarify ESG fund definitions?

Although the Securities and Exchange Commission (SEC) has de-emphasized ESG enforcement for the next year (as we reported last week), some ESG proponents are hoping the SEC’s newly revamped Names Rule—which requires funds to invest 80% of their assets in the strategy promoted in their name—will help clarify ESG fund definitions:

When it comes to ESG funds, it can be hard to define exactly what that acronym means. Even if you know the words behind the abbreviation – environmental, social and governance criteria – it’s often difficult to find a clear way to measure success in those areas.

Consider that some ESG funds are exclusionary, kicking out what they see as the worst actors. But sometimes that’s based on market-wide rankings and not vs. peer groups in the same industry. Other times ESG funds look to highlight the companies with the best track record. But how do they measure what’s “good” vs. what’s “normal” or “bad”?

In September, the U.S. Securities and Exchange Commission adopted amendments to the decades-old Investment Company Act and the “Names Rule,” seeking to provide a bit more transparency to investors. …

The language of the new Names Rule is technical, like all regulatory documents, but the gist is simple: Investment funds must invest at least 80% of their assets in the strategy they are advertising in their name. After all, you would be pretty upset if you invested in an emerging-market ETF and found out that half of the fund is allocated to U.S tech stocks or Treasury bonds. …

SEC Chairman Gary Gensler pointed out in his public statement after the ruling that names such as “sustainable,” “green,” or “socially responsible” are specific terms that now must meet that 80% threshold. And if funds do not, they have 90 days to move their portfolio into compliance or face action from the agency. …

The SEC will require a fund to clearly define the terms it uses, how it selects relevant investments in line with that philosophy, and what current portfolio assets meet those criteria to therefore fulfill its 80% obligation. …

One interesting point to note: The Names Rule in its new form does not rigidly define ESG factors or how they should be applied to any fund’s makeup.

Terms like “sustainable” or “socially responsible” are still up to the fund providers themselves to measure. There is clearly a desire by the SEC to prompt fund providers to support any terms they use with real and transparent data, as the agency will be checking on things regularly. But where those measures come from and how they are applied is still up to each ESG fund manager.

In other words, two similarly named ESG funds could both be in good standing under the amended Names Rule but be very different in their makeup based on their chosen criteria.

In the states

State attorneys general appeal challenge to labor department’s ESG rule

The state attorneys general who sued the Biden administration to overturn its rule allowing ESG considerations in Employee Retirement Income Security Act of 1974 (ERISA)-governed pension plans filed an appeal on October 26. The case was previously thrown out in a federal district court:

A group of Republican-led U.S. states on Thursday said they would appeal a Texas-based federal judge’s decision rejecting their challenge to a rule from President Joe Biden’s administration allowing employee retirement plans to consider environmental, social and governance (ESG) issues in investment decisions.

The 26 states, led by Texas and Utah, filed a notice of appeal in federal court in Amarillo. U.S. District Judge Matthew Kacsmaryk threw out their lawsuit on Sept. 21. Oil drilling company Liberty Energy Inc (LBRT.N) and an oil and gas trade group are also plaintiffs in the case and joined in the appeal. …

“Our coalition was deeply disappointed in the court’s ruling,” Utah Attorney General Sean Reyes said in a statement. The rule clearly exceeded the government’s authority, Reyes said. “We look forward to our appeal prevailing.”

The appeal goes to the New Orleans-based 5th U.S. Circuit Court of Appeals, which is considered one of the most conservative federal appeals courts and has 12 judges appointed by Republican presidents out of a total of 16. …

The Employee Retirement Income Security Act of 1974, called ERISA, requires retirement plan administrators to act solely in the interest of participants in the plan. The states in their lawsuit claim the rule violates ERISA by allowing these plans to consider non-financial factors. The states have said the rule endangers the retirement savings of millions of Americans and will deplete state tax revenue.

Kacsmaryk in his decision upholding the rule said it still requires financial factors to come first and does not require or even encourage retirement plans to consider other factors such as climate change and social and labor issues.

On Wall Street and in the private sector

Oil and gas growth could indicate ESG weakness

The New York Times’ “Dealbook” newsletter argued that the recent growth of the world’s biggest fossil fuel companies could indicate that ESG is attracting fewer investors:

To oil analysts and investors, Chevron’s $53 billion takeover of Hess confirmed that there’s a new cycle of consolidation in the industry, coming less than two weeks after Exxon Mobil’s $59.5 billion bid for Pioneer Natural Resources.

Even as fossil-fuel producers face pressure from climate-minded policymakers, investors and activists to embrace greener energy — more on that below — they’re instead focusing on getting bigger. That could create a larger gap in the industry between those who have the firepower and freedom to buy rivals, and those who, because of politics or finances, do not.

Chevron and Exxon are acting from a position of strength, striking deals while they sit on billions in cash because of rising oil prices. That’s also reflected in their share prices, which have been climbing, making it attractive to use as deal currency. …

Money managers closed their E.S.G. funds at a record clip last quarter, as Wall Street appears to be souring on the sector amid a wider market slump, slowing economic growth and higher interest rates.

The shift away from funds that take into account environmental, social, and governance factors coincides with a regulatory crackdown on greenwashing and other misleading claims by investment funds. A number of Republican-led states are also stepping up boycotts against the asset managers.

Business leaders are increasingly feeling the heat on E.S.G. Some just wish that the larger debate would disappear.

Is Big Oil bad for environmental innovation?

Investors Business Daily released its list of the most environmentally friendly and ESG-compliant companies last week and said big fossil fuel companies are among the largest owners of environmental patents:

The National Bureau of Economic Research this summer circulated research titled “The ESG-Innovation Disconnect: Evidence from Green Patenting.” Lauren Cohen of Harvard Business School authored the report, along with Umit Gurun of the University of Texas at Dallas and Quoc Nguyen of DePaul University. Many of the companies they found to be at the cutting edge of climate change mitigation are among those that ESG investors would least expect.

The professors analyzed all patents awarded to U.S. publicly traded companies since 1980. They focused only on those patents classified as “green” according to criteria laid out by the International Patent Classification system of the Organization of Economic Cooperation and Development.

They found most “recent green patenting is not driven by highly rated ESG firms — firms that are commonly favored by ESG investors and funds. It is instead driven by firms that are explicitly excluded from ESG funds’ investment universe” — fossil fuel companies especially.

For example, the professors found the following oil and gas companies to be at the forefront of green innovation: ExxonMobil (XOM), which is the 11th largest owner of green patents, Royal Dutch Shell (SHEL), the 18th largest, and BP (BP), the 27th largest. Other top green technology patent holders were ConocoPhillips (COP) (28th largest) and Chevron (CVX), (30th).

[A]mong our list of the three best companies within the five ESG dimensions, Marathon Petroleum (MPC) tops the environmental category with a score of 73.09. Marathon is in seventh place overall.

Caterpillar (CAT), the manufacturer of construction and mining equipment, is in sixth place in the IBD Best ESG Companies list for 2023. Caterpillar includes Caterpillar Global Mining, which also provides mine efficiency and productivity systems. According to the professors’ report circulated by the NBER, it is the 20th-largest owner of green patents. Also read about the Best ESG Companies In Each Of Eight Industry Categories.

Or take Air Products & Chemicals (APD), which manufactures and distributes atmospheric gases. It’s the 36th-largest holder of green patents, and stands in 18th place in the IBD list.

In the spotlight

The CFA Institute predicts ESG growth

The gold standard of financial certification, especially for asset managers, has for decades been the Chartered Financial Analyst (CFA) designation, which is awarded by the CFA Institute in Charlottesville, Virginia. The CFA Institute has supported the ESG investing framework over the last several years, following trends in the asset management business. Now, the institute predicts the framework will grow in importance and relevance in the coming years, according to its managing director for research, advocacy, and standards:

A partisan squabble over the merits of environment, social and governance (ESG) performance disclosures and their consideration in investment decisions in the United States will not derail the global trend towards more ESG disclosures and considerations, according to an industry expert.

“Right now there is a lot of noise in the US, because you have not only the federal government, but the 50 states also have a lot of say on disclosures by companies that do business in those states,” Paul Andrews, the Washington DC-based managing director for research, advocacy and standards at global investment professionals body CFA Institute, told the Post.

“There are a handful of states that are very much against disclosures on sustainability and ESG,” Andrews said. “That to me is a lot of [noise]. But if you look at the bigger picture … it is clear … [there are] more disclosures and more resources are being put into a green-energy agenda.” …

Andrews commended bourse operator Hong Kong Exchanges and Clearing (HKEX) for swiftly launching proposals mid-April to upgrade the city’s climate-related disclosure requirements, to align with recommendations made by the International Sustainability Standards Board (ISSB).

It would have been even better had HKEX concurrently proposed the adoption of a separate set of sustainability disclosure standards published by ISSB, he added.