In this week’s edition of Economy and Society:
- Acting SEC chairman pauses defense of ESG rule
- Judge issues second decision upholding Biden ESG labor rule
- North Carolina bill would bar banks from denying farmers over ESG
- Proxy advisory firm drops DEI recommendations
- ESG investors seek more corporate engagement
In Washington, D.C.
Acting SEC chairman pauses defense of ESG rule
What’s the story?
Acting SEC Chairman Mark Uyeda asked a federal court Feb. 11 to stop proceedings in a case challenging the commission’s proposed climate disclosure rules. Uyeda said in a press release, “The Rule is deeply flawed and could inflict significant harm on the capital markets and our economy.”
Why does it matter?
The move indicates the SEC under the Trump administration will stop defending the rules, effectively leaving them dead.
What’s the background?
The SEC under Chairman Gary Gensler introduced the final Enhancement and Standardization of Climate-Related Disclosures for Investors rules in March 2024. ESG opponents—including a group of 10 state attorneys general—challenged the regulations, prompting the SEC to pause their enforcement in April 2024.
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According to Citywire:
The Enhancement and Standardization of Climate-Related Disclosures for Investors – a set of climate-related rules proposed by the agency last year under previous chairman Gary Gensler – is currently being challenged in the United States Court of Appeals for the Eighth Circuit. According to the SEC’s Tuesday announcement, the regulatory agency will no longer challenge the appeal – essentially leaving the proposed rule changes dead in the water.
The proposed rules would have required ‘registrants to provide certain climate-related information in their registration statements and annual reports,’ an SEC summary states. …
‘The Rule is deeply flawed and could inflict significant harm on the capital markets and our economy,’ Uyeda stated in a Tuesday press release.
Judge issues second decision upholding Biden ESG labor rule
What’s the story?
U.S. District Judge Matthew Kacsmaryk upheld the Biden administration’s Labor Department rule allowing the use of ESG investment considerations in ERISA-governed retirement plans for a second time. The decision again rejected the legal challenge from 26 Republican attorneys general.
Why does it matter?
Kacsmaryk’s decision upheld the Biden administration’s Labor Department rule without relying on Chevron deference, which was the legal basis of the original ruling.
What’s the background?
Kacsmaryk first ruled in favor of the ESG regulation in September 2023. The U.S. Fifth Circuit Court of Appeals instructed him to reconsider the case in July 2024 after the Supreme Court’s Loper Bright Enterprises v. Raimondo decision overturned the legal precedent known as Chevron deference.
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According to Reuters:
The states argued that the 2022 rule violated the Employee Retirement Income Security Act of 1974, or ERISA, which requires retirement plan administrators to act solely in the interest of participants in the plan.
The Republican-led states said it did so by allowing such plans to consider non-financial factors. They said the rule if allowed to stand would jeopardize millions of Americans’ retirement savings. …
Kacsmaryk in Friday’s decision concluded that “the rule is not contrary to ERISA under a post-Chevron analysis,” saying arguments to the contrary embodied “wooden textualism that courts should endeavor to avoid.”
In the states
North Carolina bill would bar banks from denying farmers over ESG
What’s the story?
North Carolina Rep. Neal Jackson (R) introduced a bill last week that would prohibit financial institutions from denying services to farmers based on ESG considerations.
Why does it matter?
Agriculture has become a battleground in the debate over ESG in the last year. ESG opponents argue some farmers have faced discrimination from financial service providers based on their fossil-fuel-intensive practices. Rep. Jackson’s bill would prohibit banks from considering climate-based commitments in approval decisions.
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According to The Carolina Journal:
“Agriculture is one of the most crucial industries to the North Carolina economy,” Jackson told the Carolina Journal. “Unfortunately, farmers in our state have encountered challenges obtaining financing by some of the larger lending institutions who have determined that farming does not align with their organization’s carbon or social goals. The Farmers Protection Act ensures that there is no discrimination against NC farmers based upon a radical ESG philosophy.”
ESG practices promote environmental sustainability and purported societal and governance benefits, but climate regulations are often what drive these practices. Bill sponsors hold that ESG practices create real problems for farmers, including rising prices and smothering innovation. …
“The Farmers Protection Act would extend its anti-discrimination provisions beyond traditional banking institutions,” said Kelly Lester, policy analyst for the Center for Food, Power and Life at the John Locke Foundation. “The bill would explicitly apply its restrictions to state savings banks, state associations, and credit unions. These entities would have to adhere to the same compliance requirements and be subject to enforcement measures outlined in the legislation. By covering a broad range of financial institutions, the act would ensure that all farmers, regardless of where they bank, received equal protection against ESG-based financial discrimination.”
On Wall Street and in the private sector
Proxy advisory firm drops DEI recommendations
What’s the story?
Institutional Shareholder Services (ISS), the largest proxy advisory firm, announced Feb. 11 that it will no longer consider DEI characteristics in its corporate voting recommendations.
Why does it matter?
Corporate diversity, equity, and inclusion (DEI) policies fall under the social pillar of ESG investing. ISS’s move away from DEI voting preferences joins a larger trend, with companies like Vanguard making similar moves in the last several weeks.
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According to ESG Today:
The move by ISS forms part of a series of major adjustments being made to DEI policies by U.S. companies and investors, which began following a Supreme Court ruling that struck down Harvard’s use of race-based affirmative action criteria in college admissions, and led to increased scrutiny over the legality of key aspects of corporate DEI policies.
The phenomenon has picked up the pace since the election of Donald Trump, who signed an executive order after taking office eliminating DEI preferencing in federal contracting, and required contractors to affirm that they “will not engage in illegal discrimination, including illegal DEI.”
ISS has itself been a target of political action, with the company being warned in 2023 by 21 state Attorneys General that its support for DEI and climate-related issues at companies could be seen as being in violation of their duties to consider their clients’ financial interests.
ESG investors seek more corporate engagement
What’s the story
A group of institutions and pension funds owning roughly $1.5 trillion recently instructed their asset managers to engage more actively with corporations on climate policies.
Why does it matter?
The request contradicts the trend among owners (including Republican states) on the other side of the ESG issue that have prohibited asset managers from considering ESG factors in their voting and engagement over the last several years. The move highlights the ongoing conflict and leverage on both sides of the debate.
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According to The Financial Times:
A group of 26 financial institutions and pension funds from Australia to the US, including Scottish Widows, the People’s Partnership and Brunel Pension Partnership, have asked their asset managers to more actively engage with the companies they are invested in about their climate risk. …
[T]he asset owners group argued that climate change was a long-term financial risk, particularly for pension funds that would will need to pay out retirement incomes for decades to come.
One of the largest UK workplace pensions providers with 6mn members, the People’s Partnership said it was concerned about the consequences of backtracking on climate and other sustainable investment issues.