Blog: Economy and Society: ESG Task Force issues first enforcement action – Ballotpedia News – Ballotpedia News

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.

ESG Developments This Week

In Washington, D.C.

Wall Street Journal notes opposition to SEC’s rapid rule-making, including among Democrats        

Two weeks ago, The Wall Street Journal’s editorial board published a piece that highlighted objections to what it described as rapid rule-making at the SEC under Chairman Gary Gensler. It noted that even some Democrats have been frustrated by the tactics Gensler has employed:

“Progressives lobbied President Biden to appoint Gary Gensler as Securities and Exchange Commission Chairman because of his record as a hell-for-leather financial regulator during the Obama days. But now even some House Democrats are asking the Chairman to tap the brakes.

“We write to express concern over some of the Securities and Exchange Commission’s comment periods for complex rulemakings that may hamper the ability for the public to provide effective and meaningful input,” 47 House Members, including 28 Democrats, wrote Mr. Gensler recently. They cite two new proposed rules that would expand SEC control over private markets.

One rule would impose stringent disclosure requirements for fees, expenses and annual independent audits on private fund advisers that are similar to those for public advisers. A second would require private funds to report more information to the SEC about investment losses, among other things, supposedly so the agency can monitor systemic financial risks….

The rule-makings aren’t exactly beach reading and will require teams of lawyers and analysts to sort through their implications. Yet Mr. Gensler provided a mere 30 days for public comment. “This abbreviated period will likely hinder engagement from Congress, investors, and other market participants,” the House Members write.

House Members want Mr. Gensler to extend the public comment period to at least 90 days, which was the norm for highly complicated rules during previous administrations. The Office of the Federal Register suggests that agencies may provide up to 180 or more days for “complex” rule-makings. Mr. Gensler’s drive-by regulation seems to be a pattern.

Energy companies this week also asked Mr. Gensler to extend the 60-day public comment for a proposed 506-page climate disclosure rule, which would require businesses to report their greenhouse gas emissions including those of their suppliers and customers. “SEC should give the public ample time to consider the full impacts of this wide-ranging rule designed to deny financing to the energy sources that meet 80% of global demand now and well into the future,” they write.

Under the Administrative Procedure Act, agencies must take into account public comments. If they disagree with the comments, they have to explain why. A short public comment period will mean fewer detailed comments, which will let the agency finalize the proposals faster with few changes.

The SEC has undertaken more than 50 rule-makings that would affect nearly every investor and public company in America, and many private ones too. Mr. Gensler is rushing to complete as many of them as he can before next January, when Republicans appear likely to take control of the House and could use their appropriations power to rein him in.”

On May 9, the SEC acceded to demands from interested parties and agreed to extend the comment period for the three rules noted above by 30 days each:

“The Securities and Exchange Commission today announced that it has extended the public comment period on the proposed rulemaking to enhance and standardize climate-related disclosures for investors until June 17, 2022. The SEC also announced that it will reopen the comment periods on the proposed rulemaking to enhance private fund investor protection and on the proposed rulemaking to include significant Treasury markets platforms within Regulation ATS for 30 days.

“Today, the Commission acted to provide the public with additional time to comment on three proposed rulemakings that have drawn significant interest from a wide breadth of investors, issuers, market participants, and other stakeholders,” said SEC Chair Gary Gensler. “The SEC benefits greatly from hearing from the public on proposed regulatory changes. Commenters with diverse views have noted that they would benefit from additional time to review these three proposals, and I’m pleased that the public will have additional time to provide thoughtful feedback.””


Some observers are expecting Gensler’s climate disclosures to fail

On May 2, Shivaram Rajgopal and Bruce Usher, two professors at Columbia Business School, penned a piece for Bloomberg Law in which they looked at SEC’s climate disclosure proposal, as well as the possibility that it may be disrupted, and then examined possible alternative means for achieving the same goals. They wrote:

“[E]ven though the ink has barely dried on these newly released SEC climate rules, it’s important to recognize that the 510 pages of regulations may never be enacted. There is no consensus in Congress to act on the climate problem, Republican lawmakers have already urged the SEC to withdraw their proposal, and a more conservative U.S. Supreme Court could view the new rules as an overreach. And, state attorneys are also vowing to challenge the SEC’s proposal.

So if these rules are dead on arrival, where are the areas of promise? There are a few….

Here’s what could happen next.

First, this momentum toward climate disclosure might encourage businesses to change strategy, taking steps to move capital out of fossil fuels and toward renewable technologies and other solutions to climate change….

Second, it’s likely that the need for climate leadership will lead to businesses adding expertise. While companies like Apple, Facebook, Google, and Microsoft already report extensive emissions data, many companies lack the same level of expertise.

The Big Four accounting firms along with other professional-service firms have already started to invest in climate expertise. Ernst & Young announced that it will spend $10 billion over the next three years on audit quality, sustainability, and technology, and KPMG is planning to spend more than $1.5 billion over the next three years on climate-change-related initiatives and training on ESG issues….

Third, increased climate literacy will allow for more scrutiny of green claims, meaning capital will be more likely to flow to truly sustainable projects. As tougher climate policies are proposed and implemented, the days of corporate greenwashing—and investors being misled—could finally come to an end.

That could lead to more money flowing to projects like Apple’s Green bonds which raise capital for projects with environmental benefits, and recently funded over a gigawatt of clean power globally, equivalent to removing 200,000 cars from the road. More companies are likely to follow Apple in investing in truly sustainable projects with more regulation around climate reporting.”

Though not noted in professors Rajgopal and Usherarticle, some analysts in the capital markets and related investment community are expecting publicly traded corporations to comply with disclosure standards whether the SEC passes them or not:

“The International Sustainability Standards Board (ISSB) is rallying regulators from the U.S., Europe, Japan and other jurisdictions around common rules for disclosures about climate risk and other environmental, social and governance (ESG) issues.

The working group of regulators will meet this month and in July to craft a “global baseline” of ESG disclosure standards, according to the ISSB, which in March released for public comment proposed rules on how a company should disclose the ways it gauges and manages ESG risks. A company would also need to publicly describe how sustainability risks, such as drought or flood, affect its total value.

“There is strong public interest in seeking to align where possible the international and jurisdictional requirements for sustainability disclosures,” ISSB Chair Emmanuel Faber said in a statement. 

The ISSB, aiming to bring consistency across borders, intends to urge regulators worldwide to consider adopting its proposals as a foundation for their own domestic sustainability disclosure rules, including those focused on carbon emissions….

The ISSB, backed by the architects for global accounting rules, has asked for public feedback on its proposal by July 29. It plans to complete standard-setting by the end of 2022.

The ISSB was created by the IFRS Foundation, a London-based group that oversees the International Accounting Standards Board (IASB), and launched in November during the COP26 climate conference in Glasgow.

As with IASB rules, companies could voluntarily adopt the ISSB standards or a regulator could endorse the guidelines and require compliance by companies under its jurisdiction.


SEC’s Climate an ESG Task Force issues first enforcement action 

Among other ESG tasks, the Securities and Exchange Commission has promised to keep ESG practitioners honest. To ensure compliance with promises made, the SEC created an ESG enforcement task force in early 2021. That task force has now issued its first enforcement action:

“The SEC’s Climate and ESG Task Force has now issued its first enforcement action.  The SEC has brought a 76-page complaint in federal district court against Vale, S.A., a Brazilian mining company, alleging that Vale “ma[de] false and misleading claims about the safety of its dams.”  Significantly, Vale “regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures.”…

In essence, the SEC has brought a classic enforcement action against a company for allegedly misleading disclosures–and these disclosures are not just present in typical SEC forms (e.g, 20-F and 6-K), or in investor presentations, but in the separate ESG reports issued by Vale.  As stated in the SEC’s complaint, the “false statements to investors [were] in SEC filings, the 2016 and 2017 Sustainability Reports, and the 2018 ESG Webinar.”  This enforcement action by the SEC demonstrates that statements made in ESG reports should now be considered as ripe for litigation–whether public enforcement actions or private securities litigation–as classic sources of disclosures.    

Notably, the complaint also features allegations concerning corporate governance failures and problems with the auditing process related to the ESG reports and other disclosures.  The presence of these allegations may act to reinforce the SEC’s focus on corporate governance and attestation in its proposed mandatory climate disclosures.”

In the spotlight: Tesla joins Musk in pushing back against ESG 

While Tesla is, by definition, a company that exists specifically to reduce carbon emissions from internal combustion engine vehicles, Elon Musk and others at the company have been reluctant to share ESG-related information with ratings agencies and have, therefore, been given relatively poor ESG scores. Now, Musk and his company are pushing back:

“Tesla Inc., whose Chief Executive Officer Elon Musk has criticized ESG for making little sense, said current ways of measuring environmental, social and governance issues are “fundamentally flawed.”

In a 144-page annual report, the electric vehicle-maker said ESG ratings are based on how corporate profits are affected by ESG-related factors, rather than gauging a company’s real-world impact on society and the environment. The ratings are used by money managers to help decide where to invest. 

In effect, individual investors who park their money in ESG funds managed by large asset managers are unaware that their capital is being used to buy shares of companies that are exacerbating the effects of climate change, rather than mitigating it, Tesla said. 

“We need to create a system that measures and scrutinizes actual positive impact on our planet, so unsuspecting individual investors can choose to support companies that can make and prioritize positive change,” the Austin, Texas-based company said. It added that large investors, ratings agencies, companies and the public need to push for change.” 

Musk has been a recent critic of ESG, and has said its investment principles should be “deleted if not fixed.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s