15 May PUBLIC PENSION CORNER, #43: Three Reminders about ESG
NEWS:
I. SEC to End Biden-era Climate Rule
Last week, the Securities and Exchange Commission (SEC) sent a letter to the Eighth Circuit Court of Appeals indicating that it plans formally to rescind its 2024 rule on corporate carbon emissions reporting:
The SEC staff is preparing to rescind the rule at Chair Paul Atkins’ direction, the agency spokesperson said….
Under Gensler, the SEC approved the rule by a 3-2 vote, with Commissioners Mark Uyeda and Hester Peirce voting against it. Atkins, Uyeda and Peirce are currently the agency’s only commissioners, and all three have expressed a belief that the rule extends beyond the agency’s remit.
“Under Chairman Atkins, the Commission is focused on returning the agency to its core mandate — in line with its legal authority — restoring a materiality-focused approach to securities regulation,” the SEC spokesperson said in an emailed statement.past year, as the political environment, particularly in the U.S., has evolved to make progress towards net zero more challenging, and has seen banks come under pressure from politicians over sustainability goals and participation in climate-focused groups.
II. EBSA Chief Promises Enforcement of ESG-Use Rules in Retirement Plans
Last week, Daniel Aronowitz, the head of the Department of Labor’s Employee Benefits Security Administration, told those attending a conference that the EBSA will “prioritize” enforcement against retirement plan managers who emphasize ESG:
Aronowitz…said the agency would crack down on firms that act in bad faith to “misappropriate assets” in order to “enrich themselves or to pursue other purposes collateral to the provision of benefits to the American worker,” at a Washington DC conference focused on employee stock ownership plans.
“This would include disloyal pursuits of ESG or its sister acronym DEI,” he said. “To be clear, EBSA is focused on true bad actors. Criminals will be punished.”…
Arguments that ESG and diversity considerations violate ERISA duties of loyalty or prudence are also making their way into private litigation. A Texas federal judge found last year that American Airlines Inc. acted disloyally by favoring ESG objectives in its 401(k) plan through investment manager BlackRock Inc.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Three Reminders about ESG”
The other day, the online magazine Funds Europe published an interesting and clarifying essay. Titled “Should social media addiction be an ESG issue?” it makes exactly the case you’d expect it to:
At present, there appears to be little, if any, policies by investors aimed at social media companies on issues relating to addictive design.
Abhijay Sood, senior research manager at ShareAction, which campaigns for ESG standards in the investment management industry, says: “We have yet to see evidence that investors are systematically integrating concerns about addictive technologies in their decision-making.”
Research shows that performance on social issues generally remains low among asset managers, according to Sood, with significant gaps on issues ranging from controversial weapons to engagement with indigenous communities. “Many other issues with social implications are completely neglected in investment policies,” Sood says.
Now, as I said, this is clarifying – albeit not because it actually clears up any questions readers might have about social media companies and their shareholders. Rather, it serves as an illuminating reminder of three of the most important features of ESG and the controversy surrounding it.
First, this story serves as a reminder that “ESG” has no set definition. It means everything. And nothing. Some days, ESG rejects corporations involved in the production of weapons and armaments. Some days it doesn’t. Some days it means opposing the use of hydrocarbons to make the fertilizer necessary to feed the world. Some days it doesn’t. Some days, it frowns upon the use of slave labor in the harvesting or mining of raw materials for the production of carbon-emissions-reduction technologies. Some days it doesn’t. No two ESG ratings services use the same criteria to decide which corporations are good and which are bad. Some corporations that reduce hydrocarbon use are great, despite being owned, in part, by murderous regimes. Some corporations that reduce hydrocarbon use are terrible because their founder and CEO voted for the wrong guy. ESG is a term of art, in short, and now, apparently, it should include social media companies that “cause addiction.”
Second, this is a reminder that there really is no such thing as “voluntary ESG.” In an article earlier this month, Allen Mendenhall (my friend and colleague at the Heritage Foundation’s Free Enterprise Initiative) and Daniel Sutter (Allen’s friend and former colleague at Troy University) published an essay recounting the results of a study they conducted just over two years ago. Their findings included the following:
Perhaps the biggest myth about ESG is that it’s a private-sector phenomenon. The movement traces back to the United Nations, with its origins in the government sector. Today, government rules drive much ESG. Civil rights law pushes corporate diversity mandates. Know Your Customer regulations are behind many of the bank-account closures that draw public outrage. Far from emerging organically from market demand, ESG has been shaped by a complex interplay between public institutions and private actors, blurring the boundary between voluntary initiative and regulatory expectation.
The EU’s CSDDD takes this to its logical extreme, mandating sustainability due diligence across corporate supply chains by force of law. That’s not a voluntary movement. The regulatory compliance costs will ultimately be borne by consumers and workers. When ESG principles are codified into law, the claim that they represent market choice becomes even more difficult to sustain.
ESG took off in 2017, after the United States withdrew from the Paris Climate Agreement. For activists frustrated that democratic processes weren’t delivering the outcomes they wanted, ESG became a workaround. Deny investment and insurance to fossil fuel companies and pressure businesses to adopt diversity and climate policies that voters and legislatures rejected. In this way, ESG can function as an alternative pathway for achieving policy objectives that operate through capital markets rather than electoral politics.
In short, government, quasi-governmental organizations, and people who want to wield the power of government are the drivers behind ESG. Whatever the issue, whatever the cause, government or its surrogates are almost always the reason it bleeds through to capital markets. And it is no different in the case of social media. Back to Funds Europe:
A series of lawsuits against firms including Meta, Google and others began recently in the US, where a diverse array of plaintiffs allege that platforms are designed to be addictive, resulting in harm to children’s mental health.
In the UK, a government consultation launched in March seeks views on measures to increase children’s wellbeing online. It includes proposals to tackle ‘infinite scrolling’ and other functionalities on social media platforms that could drive addictive or compulsive usage.
In Singapore, there exists a Code of Practice for Online Safety that requires platforms to reduce exposure to harmful content and addictive features for minors, while most significantly in the EU, TikTok faces fines for allegedly breaching the EU’s Digital Services Act (DSA) over issues including addictive design. The Act aims to protect the digital rights of individuals, and ByteDance, the owner of TikTok, could have to pay fines equal to 6% of annual worldwide turnover.
This is not exactly what you’d call an “organic” investment trend. The idea that social media is addictive and should therefore be restricted and punished is purely government-driven. There is no spontaneous concern among market participants that social media companies are causing addiction and might, therefore, be considered risky investments. There is only the concern that various governments around the world will view social media as addictive and will punish social media companies for their complicity. This is a wholly government-created phenomenon.
To be sure, the repercussions are – or at least could be – real and profound for social media companies…and that brings us to our third reminder: not everything having to do with environmental or social matters is ESG. If governments are going to punish social media companies, if juries are going to be persuaded (and allowed to be persuaded) to punish social media companies, if social media companies are facing serious headwinds that could affect their bottom lines, then that is, BY DEFINITION, a material issue. It may be unfair. It may be authoritarian. It may be incredibly stupid and shortsighted on the part of the governments in question. But it’s still material. There is no need to invent a category of risk, no need to wedge the concerns into the narrow confines of ESG. Governments targeting unfavored industries is not new. Moreover, encouraging industries to fight government targeting is not political. It is a sensible business response.
Funds Europe considers the backlash against social media companies to be a “social” issue for investors (the “S” in ESG), but that’s not quite right. It’s a business matter, as government overreach usually is. ESG has no real application here – or, frankly, in markets more broadly. Something is material, or it’s not. Everything else is just manipulation and coercion.
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