Economy and Society: May 21, 2024
ESG developments this week
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.
In Washington, D.C., and around the world
Congressional Democrats ask SEC to finalize ESG disclosure rule
Twenty-one congressional Democrats sent a letter to SEC Chairman Gary Gensler on May 13 requesting that the commission continue finalizing its rule requiring additional disclosures for self-identified ESG investment funds:
The Democrats asked Securities and Exchange Commission Chair Gary Gensler to finish a rule proposed in 2022 that would require managers of mutual funds, exchange-traded funds, and other investment products that are marketed as sustainable to be more transparent about the makeup of those funds. That rule complements another regulation the agency finalized last September that scrutinizes the use of ESG labels on investment funds.
“Finalizing this rule is critical for addressing greenwashing and other exaggerated or unfounded ESG-related claims amongst funds and investment advisers,” the lawmakers wrote in their letter.
The request comes on the heels of another ESG-related disclosure rule the agency finalized in March, requiring companies to report their greenhouse gas emissions. The lawmakers said they were “encouraged” by the climate rules and want the agency to take another step toward increased sustainability disclosure.
EU issues new guidelines for ESG funds
The European Securities and Markets Authority issued new guidelines last week for ESG-labeled investment funds, requiring them to allocate at least 80% of their assets to environmental, social, or governance-related objectives. The new regulations will take effect in about three months:
Asset managers in Europe face new restrictions on what they can call an ESG fund. An investment product with ESG — or equivalent terms — in its name will need to place at least 80% of its assets under management in something that’s related to environmental, social or governance objectives, according to long-awaited guidelines by the European Securities and Markets Authority. …
The watchdog had initially planned to introduce a second requirement for funds using sustainability-related terms: to also hold at least 50% in assets defined as sustainable under SFDR. The proposal was withdrawn amid concerns that the regulation gives fund managers considerable leeway to define sustainable assets, making the threshold potentially meaningless. …
ESMA’s new guidelines will apply three months after their publication on its website in all official EU languages. Existing funds have six months to comply, while new funds must apply the rules immediately. Authorities in member states must incorporate the guidelines in their supervision of the market, or state why they don’t intend to comply.
In the states
Oklahoma pension fund extends contract with BlackRock
We reported in last week’s newsletter that an Oklahoma judge paused enforcement of the state’s anti-ESG law. Following the pause, Oklahoma’s public pension fund renewed its asset management contract with BlackRock—a restricted firm under the suspended law—on May 17:
Pension board members extended the contracts with BlackRock for the management of $7.3 billion of investments at a Thursday meeting, said Joe Fox, executive director of the pension, in an email.
BlackRock is one of the firms on a list of companies that Oklahoma’s Republican Treasurer, Todd Ross, says “boycotts” the fossil fuel industry. The list was created as a result of a state law called the Energy Discrimination Elimination Act.
In accordance with the legislation, state agencies and political subdivisions — like cities — can’t contract with a firm unless it verifies that it doesn’t engage in energy boycotts. The law also calls for pensions to divest from companies on the list.
On Wall Street and in the private sector
ESG fund liquidations continue
The number of American ESG funds continues to shrink as investors push back against the sector, according to new data released by Bloomberg Intelligence:
At least 27 ETFs categorized as being aligned with environmental, social and governance principles have been liquidated so far this year, said Shaheen Contractor, senior ESG analyst at Bloomberg Intelligence. That compares with 36 during all of last year.
And the outlook isn’t promising. The trend will likely continue, particularly if the Republican-led backlash against the investment strategy heats up, according to Contractor. …
Against a backdrop of increased fund closures, just two ESG ETFs have been introduced this year in the Americas, the fewest since Bloomberg Intelligence started tracking this data about five years ago. The number of fund launches is down from a peak of 124 during all of 2021, Contractor said.
In the spotlight
CTUP releases second annual report on ESG proxy voting
The Committee to Unleash Prosperity (CTUP)—an organization opposing ESG—last week released the second edition of its investment company proxy voting and ESG report card. The organization issued a press release making the following three arguments:
1. Many of America's major money management firms are still consistently voting for ESG/DEI shareholder resolutions that are pursued by left-wing pressure groups and shareholder activists. These votes are a violation of their fiduciary duty to their clients.
2. The general trend since 2022 is AWAY from ESG. The study finds that major money managers were about 25 to 30% less likely to vote for hostile ESG resolutions in 2023 than they were in 2022. But the study also finds that about half the time these companies continue to support these ESG resolutions.
3. The worst actors of all are the two major proxy voting advisory firms – ISS and Glass-Lewis. These advisory firms – which are employed by most major money managers – almost always recommend "yes" votes on the most egregious ESG resolutions. ISS received an implied grade of F for their recommendations and Glass Lewis an implied grade of D.
The editorial board of The Wall Street Journal argued that CTUP’s findings were good news for ESG opponents:
In the murky world of shareholder proxy voting, a little media scrutiny goes a long way. Asset managers hoped investors wouldn’t notice how their shares were being voted, but many have curbed their ESG enthusiasm now that word is getting out. Even BlackRock has turned a new leaf.
These are the findings of “Putting Politics Over Pensions,” a new report by the Committee to Unleash Prosperity, which tracks big firms’ records on shareholder votes. Last year’s report broke the bad news that portfolio managers were following the progressive political herd on environmental, social and corporate-governance proposals. Most funds backed political resolutions unrelated to enhancing shareholder value, such as forcing companies to divest from fossil fuels or adopt racial equity audits.
The news this year is that some of the funds are backtracking. The latest report finds that support for ESG resolutions dropped 25% in 2023 from 2022, including a 30% drop among the 25 most active fund families. Progressive shareholders—often with only a few shares—are putting forward more proposals than ever, trying to pressure executives into adopting their causes as corporate policy. But non-ESG-branded funds aren’t backing them like they were a year ago.
