SEC may remove Scope 3 emission requirements from disclosure rules

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.

In Washington, D.C.

ESG advocacy group launches eight-figure campaign

Axios on February 22 reported on the launch of Unlocking America’s Future’s (UAF) new eight-figure ESG advocacy campaign aimed at pushing back against ESG opponents:

A young advocacy group that defends climate-focused investing is launching the next phase of its campaign Thursday. …

Unlocking America’s Future (UAF) just began its first paid media campaign since announcing a wider eight-figure advocacy push in late 2023. …

They hope to parry right-leaning critiques against Wall Street’s environmental, social and governance (ESG) practices.

Late last year, Politico’s “Playbook” newsletter reported on UAF’s initial campaign announcement and identified some of the group’s key players:

Unlocking America’s Future is launching an eight-figure campaign led by Zac Petkanas, Josh Schwerin, Erika Gudmundson and Kyle Herrig aimed at protecting “responsible investing,” also known as environmental, social, and governance (ESG) investing. The nonpartisan group says it will spend more than $10 million dollars on paid media, message testing and other grasstops tactics to “strike back against well-funded attacks targeting American businesses, investors, and consumers.”

Two days after Politico’s item was published, Tim Graham, the executive editor of NewsBusters and director of media analysis for the Media Research Center, argued against Politico’s description of the group as nonpartisan:

Monday’s Politico “Playbook” team touted a new “pro-ESG play.” ESG stands for “environmental, social, and governance” principles for corporations. The Left forces “woke” ESG standards on investors. Politico reported a group calling themselves “Unlocking America’s Future” is launching a $10 million campaign to defend against ESG critics, calling them a “nonpartisan group.”

They mentioned Zac Petkanas, but didn’t note he runs Petkanas Strategies LLC, a Democratic strategic consulting firm. He touts his stints for Hillary Clinton and Harry Reid on Twitter. They mentioned Josh Schwerin, but not his firm Schwerin Strategies. Likewise, on Twitter he touts his service with Clinton, Terry McAuliffe and the Democratic Congressional Campaign Committee. They mentioned Erika Gudmundson, and rinse and repeat: She touts working for Hillary Clinton, for Chelsea Clinton and for the Clinton Foundation.

SEC may remove Scope 3 emission requirements from disclosure rules

Axios also reported last week that the Securities and Exchange Commission (SEC) may be preparing to drop the Scope 3 emissions reporting requirements—which proposed requiring public companies to report on emissions generated in their supply chains—from its new climate disclosure rules, with a final decision expected next month:

The Securities and Exchange Commission is said to be scrapping plans to require that public companies disclose carbon emissions from their supply chains and end users as part of its long-awaited disclosure rules.

Why it matters: Scope 3 emissions, as they’re called, are often the largest source of carbon emissions for companies, and especially in the fossil fuel industry.

The regulator’s potential move is part of a broader retreat — or at least rethink — within the financial and corporate sector on environmental and social issues. Politics is playing a major role in the backlash.

Politico reported on the rumors that the SEC will remove Scope 3 emissions standards from the rules and suggested the agency might also reduce Scope 1 and Scope 2 disclosure standards, which refer to emissions reporting requirements related to a company’s operations and energy usage:

If finalized, the scaled-back rule could represent a major victory for groups like the U.S. Chamber of Commerce and the American Farm Bureau Federation that have questioned the legality of the proposal and the agency’s authority to compel such disclosures. …

In the latest draft of the landmark rule, the SEC has dropped a mandate that certain large companies report to investors information about the emissions generated by their suppliers and customers, known as Scope 3, said the person, who was granted anonymity to discuss non-public information.

The Wall Street regulator is also likely to ease proposed reporting requirements related to emissions generated directly from a company’s operations as well as its energy usage, known as Scopes 1 and 2, the person said. The person added that the agency has hinted that the disclosures could be tied to how important, or material, the information would be to the company’s investors.

In the states

State-level ESG legislation may be slowing

Reuters reported last week on Ropes and Gray attorney Jonathan Reinstein’s expectations for ESG legislation in 2024, after two relatively busy ESG lawmaking years in 2022 and 2023. Reinstein argued that the present outlook for further state legislative action is complicated and challenging and said he expected activity to slow:

Looking across the current landscape, there are at least 61 anti-ESG bills that have been identified as either introduced by a state legislature but remain pending in committee or are supposed to carry over from the last legislative session to the 2024 session, according to the firm. The most active states have been Oklahoma with 14 bills, followed by South Carolina (9), Missouri (8), and West Virginia (7). …

[T]here are states like Arizona and Wisconsin where political power is divided between the legislature and governor’s office, so the likelihood of one of these polarizing anti-ESG bills getting adopted is also low. However, even in states like New Hampshire, where Republicans control both the governor’s office and state legislature, if a bill goes too far or is too aggressive, that will likely fail as well, said Jonathan Reinstein, an attorney with Ropes and Gray.

That situation played out recently with a controversial bill that was introduced last month (House Bill 1267) in the New Hampshire legislature that would make it a felony, punishable by up to 20 years in prison, if a fiduciary, which would include asset managers, invests state or taxpayer funds knowingly in a manner violating fiduciary duties by considering ESG criteria. HB 1267 was unanimously rejected by the House Executive Departments and Administration Committee on Feb. 8. The committee vote came on the heels of a public hearing in which opponents outnumbered supporters 34 to 3.

On Wall Street and in the private sector

BlackRock argues ESG advocacy could create reputational risk

Supporters of ESG have generally argued that corporations should implement ESG (especially social) policies to mitigate reputational risks to their brands. Now, BlackRock—the largest asset manager in the world and a leading provider of ESG funds—last week indicated in documents filed with the SEC that ESG advocacy itself could create problems related to reputational risk:

In the risk disclosures section of its annual report filed with the Securities and Exchange Commission Friday, BlackRock added a section noting it “faces increasing focus from regulators, officials, clients and other stakeholders regarding ESG matters.” …

The world’s largest asset manager became a political target for conservatives in recent years after it offered and promoted funds that use ESG criteria. Chief Executive Larry Fink has said he no longer uses the term in part because it is too vague.

BlackRock has previously warned of reputational risks tied to ESG.

Judge allows lawsuit to move forward against American Airlines’ ESG retirement investing practices

A federal judge in Texas ruled last week that an employee lawsuit against American Airlines claiming the company violated its responsibilities to its employees and retirees by investing retirement funds in ESG products can move forward:

U.S. District Judge Reed O’Connor said pilot Bryan Spence can move forward with his lawsuit claiming the airline breached its duties to plan participants by choosing investment managers focused on “nonfinancial” issues of environmental, social and governance. …

Spence sued the airline last year, saying it had violated the Employee Retirement Income Security Act (ERISA), which governs how retirement funds are administered in the U.S. …

He claimed that American failed its duties to remain loyal to retirees and prudently oversee their assets by engaging investment advisors who “pursue political agendas” through ESG strategies and voting at shareholder meetings.