U.S. Securities and Exchange Commissioner Mark T. Uyeda says that establishing formal standards for rating companies’ adherence to liberal environmental, social and governance (ESG) goals and ideology could have Orwellian consequences.
In a speech last Thursday, the Security and Exchange Commission (SEC) commissioner shared his personal opinions regarding the Labor Department’s new rule on ESG investing by retirement account managers under the Employee Retirement Income Security Act (ERISA).
In his speech, titled “ESG: Everything Everywhere All at Once,” Uyeda addressed recent calls to create standardized measures to gauge a company’s ESG credentials. Creating government-dictated standards, proponents argue, would cut down on so-called “greenwashing,” in which companies exaggerate their “green” practices, in order to deceptively attract investors seeking to advance liberal, ESG causes.
“I have significant concerns that the goal of establishing ESG rating standards goes far beyond preventing ‘greenwashing,’ Uyeda said, warning that the standards could be misused as a tool to force compliance with a “a particular political or social agenda”:
“Rather, these standards may be intended as a means for asset managers to engage with company management in a broader effort to drive companies to satisfy the criteria of a specific ESG rating service.
“Because ESG ratings may be divorced from matters of financial materiality, they can reflect a particular political or social agenda. The result – and perhaps the point – is that companies will be forced to further the agenda of the ESG rating firm in order to obtain capital.”
“The emerging system has more in common with a George Orwell novel than what anyone would consider an accepted financial analysis tool,” Uyeda concluded.
However, regulatory efforts to-date have focused on asset managers and other fiduciaries, instead of ESG rating firms – which has created its own set of challenges, Uyeda said, noting that the Trump Administration’s 2020 ESG rule was clear, while Biden’s new Labor Department (DOL) rule is not.
“[I]n 2021, the DOL attempted to move away from this clear principle and place its finger on the scale of ESG investing,” but instead ended up merely creating confusing, Uyeda explained:
“Regulators have found tackling ESG to be quite difficult. For instance, the U.S. Department of Labor (DOL) adopted a rule in 2020 that set forth clear standards for ERISA fiduciaries in selecting and monitoring investments for employee sponsored benefit plans.”
“While the new rule states that ‘[r]isk and return factors may include the economic effects of climate change and other ESG factors,’ this permissive language added to the body of the rule seems merely to create confusion as to why ESG factors – and not any other type of investment factor – are singled out as being permissible for consideration.”
“The 2020 rule permitted an ERISA fiduciary to consider any factors – including ESG factors – that were financially material to an investment decision. This is why the DOL’s messaging regarding the new rule is so confusing.”
What’s more, Uyeda said, the text of Biden’s new rule appears to contradict his own administration’s claims about it:
“On the one hand, to the extent the language of the new rule is read solely in a vacuum – a comparison of the final rule text to the proposed rule text might lead one to believe that the new rule represents an endorsement and re-affirmation of the Trump Administration’s position.
“On the other hand, if one reads the contemporaneous statements of DOL leadership, the rule represents a significant change that permits a greater degree of consideration of ESG factors, which would potentially conflict with the law. Which is it?”
“Regulators speaking with a forked tongue ought to be the hallmark of acting in an arbitrary and capricious manner,” Uyeda said.
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