Implications for federal ESG rules following SCOTUS decision overturning Chevron

ESG developments this week

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.

Implications for federal ESG rules following SCOTUS decision overturning Chevron

The U.S. Supreme Court decided 6-3 to overturn Chevron deference on June 28, holding that federal courts may not defer to agency interpretations of ambiguous statutes and must rely on their own interpretations of laws. 

The decision raises new questions in the landscape of federal ESG regulation.

The Department of Labor’s rule on ESG investing in Employee Retirement Income Security Act of 1974 (ERISA)-governed retirement plans, which is being challenged in federal courts, will provide one of the first insights into regulatory authority in the new post-Chevron environment:

Judge Matthew Kacsmaryk of the US District Court for the Northern District of Texas leaned heavily on the Chevron doctrine in his September decision that the US Labor Department acted within its authority in issuing the environmental, social, and corporate governance investing rule.

But that was before the US Supreme Court overturned Chevron in Loper Bright Enterprises v. Raimondo June 28, ending the requirement that judges defer to reasonable agency interpretations when the law is ambiguous or silent.

The coming showdown at the US Court of Appeals for the Fifth Circuit between the Biden administration and red state attorneys general suing over the ESG regulation could have a broad influence over how courts deal with these Administrative Procedure Act rules challenges post-Loper Bright. Federal district court judges have already begun to override Biden rulemaking in the days since the justices’ decision.

The decision overturning Chevron may also make it harder for the Securities and Exchange Commission (SEC) to defend its rules requiring emissions disclosure standards for publicly traded companies in court:

When the U.S. Securities and Exchange Commission adopted the Climate-Related Disclosure Rule in March, it was met with a series of legal challenges questioning the ability of the SEC to adopt the rule. Despite assertions from SEC that they had been granted the authority by Congress, they delayed implementation while the courts settled the question. Even under the previous legal standard, the authority of the SEC was questionable. However, under the new standard adopted by the Supreme Court of the United States on June 28, defeat of the rule is almost certain. …

In the combined cases of Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo, a 6-3 majority overturned the Chevron deference. This raises the burden for administrative agencies to prove they have the authority to create a rule. This is a considerable problem for the SEC as it relates to the Climate-Related Disclosure Rule.

In the states

State judge dismisses lawsuit opposing ESG investments in NYC pension plans

New York State Judge Andrea Masley on July 3 dismissed a lawsuit brought against New York City public pension funds opposing the system’s divestment from fossil fuels. Judge Masley ruled the plaintiffs—including four city employees—did not have standing to sue and did not sufficiently demonstrate that the fossil fuel divestment injured them

New York State Judge Andrea Masley ruled the plaintiffs, including four city employees and the conservative nonprofit Americans for Fair Treatment, lacked standing to bring the case against the New York City Employees’ Retirement System, Teachers’ Retirement System of the City of New York and the Board of Education Retirement System of the City of New York. The plaintiffs had sought class-action status.

Masley also ruled the accusers in Wong et al. v. NYCERS, brought in New York State Supreme Court, did not demonstrate sufficient injury. The accusers alleged the retirement security of plan participants was harmed by the plans’ divestment from securities of certain fossil fuel companies, constituting a fiduciary breach.

The plaintiffs “have not demonstrated sufficiently concrete or particularized harm,” wrote Masley.

BlackRock announces support for pension alliance

BlackRock, the world’s largest asset manager, has announced its support for the Alliance for Prosperity and a Secure Retirement. The group, led by retired Phoenix firefighter Tim Hill, argues that state politicians should stop pushing back against ESG and allow asset managers to make decisions about ESG in pension plans:

Hill said the group had been set up to rally pension industry participants in support. “We decided we were going to try and take this different tack of enlisting the industry to assist us, primarily in the financial burden of pushing back and protecting our funds and fund managers,” he said.

BlackRock said in a statement that it was “proud” to back the alliance, adding: “As a fiduciary, our mission is to help more people experience financial wellbeing in all phases of life. The alliance is one of many organisations that BlackRock supports which are committed to helping more Americans retire with dignity on their own terms.” …

BlackRock’s website lists the Alliance for Prosperity as one of 13 organisations that it is working with to encourage discussion of retirement issues. The group is backed mostly by public safety unions, which have a history of being more conservative on climate and social issues than some of their counterparts in service industries. It also includes a federation of builders’ unions whose pension funds have $800bn in assets, including the US’s largest electricians’ union.

On Wall Street and in the private sector

ESG-related shareholder proposals break record

The number of ESG-related shareholder proposals submitted during the annual general meeting (AGM) season—both for and against ESG—set a new record this year:

Investors’ ESG and anti-ESG proposals at AGMs have broken records so far in 2024, increasing by 5.2 percent on 2023’s numbers.

Anti-ESG proposals drive the overall new trend, rising by 19 percent from 94 in 2023 to 113 in 2024 and marking a notable 90 percent increase on 2022. This is according to preliminary data from Georgeson’s early proxy season 2024 review, based on available annual meeting results gathered from July 2023 through May 2024.

Meanwhile, despite the record number of proposals, investor support for both sides continued to decrease:

Public companies dealt with a high number of shareholder proposals this proxy season but few that went to a vote passed and fewer than a handful of hot-button E&S proposals received a majority vote, a Freshfields analysis shows. 

There were 945 proposals submitted since the beginning of the year, through mid-June, with the bulk of those concentrated in just under 300 companies. Amazon was the strongest magnet for activist shareholders, attracting 18 proposals, compared to a typical 2-3 proposals each among S&P 500 companies. 

Of the 945 proposals, only 53 received majority support, and all but a handful of those were bread-and-butter governance related. The rest either didn’t reach majority support or they never made it to a vote, either because they were omitted after having been granted a no-action request by the Securities and Exchange Commission, were withdrawn by the shareholders making the proposal or otherwise not included on the proxy. Some are still pending a vote.

Study argues that ESG investing doesn’t boost returns

A new study by Canada’s Fraser Institute examined the performance of ESG-related investments and argued that ESG supporters’ claim that the strategy improves returns is wrong:

Environmental, social and governance (ESG) is a movement designed to pressure businesses and investors to pursue larger social goals. According to ESG theory, firms that receive poor ratings from ESG rating agencies should lose investment dollars. Yet the claim that ESG-focused investing can help investors do well by doing good has received surprisingly little empirical support from academic studies.

However, according to a new study published by the Fraser Institute, which tracked 310 companies listed on the Toronto Stock Exchange from 2013 to 2020, neither ESG rating upgrades nor downgrades were related in a statistically significant way to the stock market performance of companies.