Congressional and Commission Republicans are mapping out the upper limits to the new SEC’s sustainable investing goals.
The Biden Administration – and new commission chairman Gary Gensler – have promised to make climate change, racial diversity and class disparities the targets for their reform efforts. Such efforts, broadly known as ESG, are popular with investors. But the GOP has some questions.
“To the extent that as chairman you intend to continue this ‘enhanced focus’ on climate and other ESG-related issues,” House Republicans Patrick McHenry and Bill Huizenga wrote in a letter sent to Gensler before the ink on his nomination was even dry, “we insist that the Commission ensure any changes to the Commission’s disclosure regime are consistent with the historical practice of requiring only disclosures of information that are actually material to investors.”
‘Abuse of authority’
McHenry is ranking member on the House Financial Services Committee. Huizenga is ranking member on the Financial Services’ Subcommittee on Investor Protection.
“It would be an abuse of the Commission’s authority,” they say in their April letter, “to stray beyond the materiality standard to achieve noninvestment-related social goals, particularly when such issues are better addressed by Congress or other regulators.”
The GOP’s position on ESG is complicated. Few Republicans are against ESG standards per se. Commissioner Hester Peirce has made it clear that she sees ESG as a problem of disclosure. What she resists, Peirce says, is the idea that a Washington bureaucrat could dictate to citizens what “ethical” “sustainable” and “good governance” looks like.
JW Verret is a professor at George Mason University’s law school. He helped prepare former SEC Chairman Jay Clayton for his Senate confirmation hearings four years ago. Verret says it’s reductionist to distill ESG questions down to party. He sees the field contested by “traditionalists” and ESG enthusiasts.
“The traditional materiality test in Levinson is sort of where this discussion starts,” he says, referring to the 1988 Basic Inc. v. Levinson case, in which the Supreme Court marked out the limits of “materiality” in SEC enforcement cases. “ESG is an investment option. That’s already covered by securities laws. If someone’s got an ESG fund they’re marketing and they’re lying about it, there are enforcement mechanisms for that.”
The ESG ‘illusion’
Verret admits that he is skeptical about ESG. He says he’s worried that it’s a marketing gimmick investment advisers exploit “to change the subject away” from the high fees they charge. The idea of federal regulators intervening on something like that doesn’t make him feel any better.
“My deepest concern is that it will impact GAP and auditing,” he says. “Those are kind of sacrosanct.”
In an April 29 speech to the ISDA Derivatives Trading Forum, Peirce said she was “disconcerted” to see her colleagues hadn’t learned any lessons from “the LIBOR debacle.”
Regulators “can build a neat set of ESG metrics that then get incorporated into a whole array of financial transactions,” she said, “but if that neat set of metrics represents expert judgment rather than reality, will not capital be misallocated? If it conveys a false sense of confidence, will its mere presence not mislead investors and others?”