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What the Red Trickle means for ESG

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weekend notes

Why anti-ESG campaigns don’t work

The massive red wave that threatened to overwhelm the Democrats in the midterm elections turned out to be a trickle made possible by gerrymandering.

Even with a little brainstorming about political science, we don’t live in normal times, so it doesn’t make sense that this would be a typical midterm. We have never experienced a continuing threat to democracy led by the former president and the hundreds of extremists he supports in votes across the country. It made me keenly aware of the meaning.

Inflation, gas prices, and crime may have mobilized the Red Army to vote, but Trump, election denial, riots, and Dobbs were more than enough to offset that and mobilize Blue Army voter turnout. , was roughly 50-50, as in the last four elections.

The narrow Republican majority in the House has led to Governor Ron DeSantis’ gerrymandering of congressional districts in Florida, the failure of Democrats to redistrict in New York, and, of course, temporary enforcement of the provisions of the Voting Rights Act. It is with the support of the Supreme Court that has been suspended. It aims to ensure representation of racial minorities in seat allocation. These factors appeared to move more than enough seats to the Republicans to cede the majority of the House to the Republicans.

Running alongside this year’s election was a right-wing anti-ESG campaign. I don’t think even the simplistic ideological messages of the Right have played much of a role on the ground because they were too complex for most candidates to handle.

Nonetheless, with the Republican Party now in control of the House, it is expected to amplify opposition to all things ESG. Or at least try. See below for more information.

Expect the DOL’s final rule to be released at any moment, followed by a lengthy legal battle over the SEC’s climate disclosure rule.

Meanwhile, the Biden administration has four rules that are in the process of being finalized. The first, which will be published in its final form at any time, is a Department of Labor rule called: “Prudence and integrity in choosing institutional investments and exercising shareholder rights”.

This rule addresses both ‘ESG as a process’ and ‘ESG as a product’. It becomes clear that the ERISA plan fiduciary will need to consider material climate change and ESG-related factors in the investment decision-making process. It also reveals that sustainable funds can be used as the default investment in plan menus, opening the door for target-dated funds that explicitly use ESG criteria to be used in retirement plans.

The US Securities and Exchange Commission has finalized two rules for sustainable funds. “Investment company name” and “Enhanced Disclosure by Certain Investment Advisors and Investment Firms Regarding Environmental, Social and Governance Investment Practices”.

The name rule reinforces the requirement that a fund’s portfolio must reflect what is implied by the fund’s name. Funds with ‘ESG’, ‘sustainable’, ‘impact’ or similar terms must have at least 80% of their assets invested in securities that meet that description. There are some issues with this. That is the assumption that, for example, “ESG stocks” do exist. However, as long as 80% of the assets are selected, process ESG criteria should be emphasized and passed.

Disclosure rules require more disclosure about how funds use ESG. An investor who simply uses his ESG as part of what the SEC calls an “ESG integration” fund should detail the role his ESG plays in the investment process. Funds that claim to be ‘ESG’ or ‘sustainable’ or ‘impact’ funds should detail the approach they use.

And then there’s the climate. Proposed rule titled “Strengthening and standardizing climate-related disclosures for investors” requires publicly traded companies to report their Scope 1 and Scope 2 greenhouse gas emissions and disclose material climate-related risks. The latter may require disclosure of Scope 3 emissions.

Don’t expect the SEC’s proposed rule to be finalized until next year. All three have been delayed as the commission reopened the public comment period in October due to a glitch in the SEC’s system for receiving public comments.

Of the proposed rules, the SEC Name Rule and the ESG Disclosure Rule have sparked internal debate within the investment industry, typical of many government regulations, but have failed to attract the attention of the right. Ultimately, these rules are just trying to make investors more transparent when a fund uses ESG criteria.

In contrast, the DOL rule, while uncontroversial within the investment industry, has been criticized, especially as it is expected to clarify that voting is an area where retirement plan managers can consider ESG. Sure to inspire ESG rights. One of the things fueling his opposition to ESG on the right is his shareholder success on ESG-related issues in the engagement and voting process in recent years.

Climate rules are an exaggeration. The investment industry generally supports it, but companies are concerned about the complexity and cost of disclosure. And since Republican climate change policy is about doing nothing, the right will definitely go to the mat to fight this rule.

in that ruling West Virginia vs EPA Last summer, the conservative Supreme Court invoked a new “major issue” doctrine that limits the scope of executive rulemaking on so-called major issues when Congress does not explicitly delegate policymaking to federal agencies.

The SEC’s position is that climate change poses investment risk, as defined by investors. Therefore, the SEC has the power to require climate-related disclosures to provide investors with the information they need to make prudent decisions. Congress long ago delegated the power to the SEC to require disclosure of material risks.

So, once the climate rules are finalized, we can expect to be embroiled in lengthy litigation while global temperatures continue to rise.

House investigates

And what about that thin House Republican majority? With Democrats in control of the Senate and White House, Republicans in the House can try to expand right-wing anti-ESG campaigns through the oversight functions vested in Congress. It’s unclear where destroying the ESG sits on their surveillance agenda, as they have other fish to fry on the front lines of surveillance, such as investigating major threats to the Republic.

Why anti-ESG is a political loser

I say this because expanding ESG will ultimately help Democrats more than Republicans. Remember that the political calculation to highlight the issue today is whether it can be used to generate voter turnout. is that climate change is real and needs to be addressed urgently by investors and generally, so companies should of course disclose their climate-related risks. Another key component of the ESG stance is that companies should treat their employees better. Because it’s not only right, but companies with a loyal and stable workforce are more likely to outperform in the long run than those who treat their employees poorly. (Looking at you, Elon). Amplifying these things appeals to the Blue Army, especially to younger voters.

The anti-ESG stance appeals to those who do nothing about dwindling climate change. A poll earlier this year for his Yale program on climate change communication found that 68% of his registered voters think business and industry should do it. more to combat global warming. 38% of conservative Republicans and 60% of moderate Republicans thought so.

Anti-ESG campaigns may be appealing to those who believe that companies that treat their employees and other stakeholders better are only taking profits away from their shareholders. But a poll by JUST Capital shows that there is broad support across political divisions that companies should put workers first, which should drive competitive advantage.

More specifically, the anti-ESG stance appeals to those who believe white men are being displaced by unqualified women and people of color. But, this year’s survey by the Eagleton Center at Rutgers University shows that the majority of people value racial and gender diversity in the workplace. 63% of Democrats think so, and 54% of independents think so. Only 36% of Republicans agreed.

Ultimately, anti-ESG campaigns will be losers. Because it tries to limit the freedom of investors. It’s the freedom to use whatever criteria an investor deems important to make a decision, whether it’s a large asset manager or a private investor saving for retirement. To tell the growing number of sustainability-minded people around the world today that they cannot use sustainability criteria in their investment decisions is no start.

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