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.
Labor department ESG rule sent back to lower court for rehearing
The U.S. Court of Appeals for the Fifth Circuit ruled July 18 that the U.S. District Court for the Northern District of Texas must rehear the Republican attorneys general lawsuit opposing the Department of Labor’s 2022 rule allowing the use of ESG in ERISA-governed pension plans. The Fifth Circuit said the lower court needed to consider the Supreme Court’s ruling in Loper Bright v. Raimondo, which overturned Chevron doctrine—the basis of the original lower court ruling:
Red-state attorneys general who sued the Labor Department over its rule permitting sustainable 401(k) investing must pursue their claims before a lower court after a Fifth Circuit panel opted to send the case back.
The appeals judges cited Loper Bright Enterprises v. Raimondo, a recent landmark US Supreme Court ruling, in a Thursday decision to let a Texas federal district judge weigh arguments against the DOL’s regulation allowing for more environmental, social, and governance considerations in private-sector retirement accounts. …
“In upholding the Department of Labor’s reading, the district court relied upon the decades-old Chevron deference doctrine,” Fifth Circuit Judge Don R. Willett said in the Thursday opinion. “Given the upended legal landscape, and our status as a court of review, not first view, we vacate and remand so that the district court can reassess the merits.”
In the states
State judge blocks Oklahoma anti-ESG law
Oklahoma District Court Judge Sheila Stinson on July 19 permanently blocked the state’s Energy Discrimination Elimination Act, which prohibited state contracts with asset managers who boycotted fossil fuels:
A lawsuit filed by Don Keenan, a retiree, challenged the constitutionality of the law, arguing that it was vague and violated the state constitution’s “exclusive benefit” rule requiring state pension systems to operate solely for the benefit of state pensioners. …
The ruling to permanently halt the enforcement of the law follows Stinson’s decision on May 7 to halt it temporarily, a move that drew the attention of Attorney General Gentner Drummond. …
The controversial law, known as the Energy Discrimination Elimination Act, requires firms to sever ties with firms that factor environmental, social and governance issues into their investment decision-making.
Report argues states will regulate emissions disclosures
As federal courts continue to consider the Securities and Exchange Commission’s rule requiring mandatory carbon emissions reporting, the Fitch Group released a report last week arguing that states will create and enforce their own disclosure rules:
New laws and regulations at the state and federal levels in the U.S. are anticipated to create mandatory requirements for thousands of companies to provide climate-related reporting, in areas including value chain emissions and climate-related risks, even in the potential absence of climate reporting rules from the Securities and Exchange Commission (SEC), according to a new report by Fitch Group’s sustainability-focused analytics business Sustainable Fitch.
The report comes as a new rule recently passed by the SEC creating mandatory climate-related reporting requirements for public companies in the U.S. faces a series of challenged in its path to implementation.
The report notes, however, that as barriers to climate action and mandatory disclosure have continued at the federal level, “individual states have stepped in and now play a significant role.” Most notably, in 2023, California passed SB 253, the “Climate Corporate Data Accountability Act,” which will introduce requirements for companies with revenues greater than $1 billion that do business in California to report annually on their emissions from all scopes, including direct emissions (Scope 1), emissions from purchase and use of electricity (Scope 2), and indirect value chain emissions (Scope 3). The law will also require companies to obtain third party assurance for their emissions reporting.
On Wall Street and in the private sector
Financial firms scale back ESG fund launches
The biggest asset management firms in the world are scaling back their launches of new ESG-focused investing funds, according to a recent Bloomberg piece:
BlackRock Inc., Deutsche Bank AG’s DWS Group, Invesco Ltd. and the asset management arm of UBS Group AG are among firms that have cut the number of new funds with environmental, social and governance mandates, according to data provided by Morningstar Direct.
This year through the end of May, just over 100 ESG funds were launched globally, putting the industry on track to fall well short of levels seen in recent years, the data show. By comparison, there were 566 ESG fund launches during all of 2023, which was down from the 993 seen in 2022. What’s more, the 16 ESG funds opened in May represent the lowest monthly tally since the beginning of 2020.
Against a backdrop of political attacks in the US combined with a crackdown on greenwashing in Europe, it’s the latest sign that the finance industry is cooling to the ESG label. Since its pandemic-era heyday, a cocktail of higher inflation, higher interest rates and a slump in clean-energy stocks has driven down ESG fund performance. Those doing well are generally packed with tech stocks, many with questionable ESG attributes.
Corporations reducing ESG pay incentives
Many corporations—especially in the United States and Europe—have aligned executive pay incentives with ESG goals. Recently, some companies have eliminated those incentives in response to ESG pushback:
Advanced Micro Devices, Motorola and Regions Financial are among a dozen companies that have removed diversity criteria from executive bonus plans this year after pressure from conservatives, as the political backlash to the initiatives continue to divide US boardrooms.
The 12 companies were among 60 that dropped environmental, social and governance incentives from their executive pay plans after pressure from Strive, the anti-ESG asset manager founded by Donald Trump ally Vivek Ramaswamy. Launched in 2022, Strive has more than $1.6bn of assets under management. …
Amid increasing pressure from Republicans on corporate DEI initiatives, companies have scrambled to cut them. Tractor maker Deere said on Tuesday it would roll back various DEI initiatives such as supporting external “social or cultural awareness parades”, and reaffirmed it had no “diversity quotas” or “pronoun identification” in the business. In June, retailer Tractor Supply said it would eliminate all its diversity roles.