Environmental, Social, and Governance and Capital Markets

Environmental, Social, and Governance (ESG) has become a hot-button issue as it relates to providing capital to businesses in the United States (and elsewhere).  See our July 20, 2022 blog, “American Bankers Strongly Worded Letter on ESG.”

Further, as we shared on May 31, 2022, the US Security and Exchange Commission (SEC) is levying fines on ESG Funds for “…misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed.”

We now learn about larger SEC Plans and some “red states” that are taking actions against certain lenders who limit lending to traditional forms of energy (hydrocarbon based).

SEC Ramping Up Enforcement

According to a report in Bloomberg Law, “A new SEC task force to police corporate environmental, social and governance disclosures is gradually ramping up enforcement, putting companies on notice.”

Bloomberg reports that “The Securities and Exchange Commission created its Climate and ESG Task Force a year and a half ago.  The unit has mostly kept working behind the scenes.  But in the last four months, it has helped bring at least three enforcement actions, according to agency records” (emphasis added).

The companies named in the enforcement are Bank of New York Mellon Corp., Benefytt Technologies Inc. (a health insurance distributor), and Vale S.A. (a Brazilian Mining Company).

Furthermore, the SEC is working on new rules to “combat bogus ESG claims by investment funds and to force companies to disclose how climate change affects their operations.”  Bloomberg reports that SEC Chair Gary Gensler is facing pressure from Democrats and investor advocates to guard against misleading corporate disclosures about climate change and other ESG issues.

SEC’s Enforcement Division

Based on the Bloomberg article, more enforcement actions may also come with help from the SEC’s Divisions of Corporation Finance and Examinations.  The units are reviewing company disclosures and investment firms with particular attention to what is said about ESG.  “The staff in the units can send information about potential wrongdoing to the SEC’s Enforcement Division, which must use existing rules to bring ESG cases since the new regulations are still not in place.”

According to the article, Goldman Sachs Group Inc. may be the task force’s next announced case.

State “Counter Actions”

Contrary to the action by the SEC and the strong ESG “push” was a development in West Virginia.

The state treasurer of West Virginia formally barred the state from conducting business with five major financial institutions because, according to him, “[e]ach financial institution . . . has published written environmental or social policies categorically limiting commercial relations with energy companies engaged in certain coal mining, extraction or utilization activities . . . . These policies explicitly limit commercial engagement with an entire energy sector based on subjective environmental and social policies” (Source: Mintz Law Firm).

“Progressive Trojan Horse”

On August 18, 2022, The Parkersburg News and Sentinel wrote, “State Treasurer Riley Moore and financial officers from other states warn that the trend by financial institutions to base investments on non-financial factors, such as environmental and social issues, are a ‘progressive trojan horse’ to get around the normal political process.”

In the blog post by Mintz, the author states, “It is likely that this action by West Virginia is merely the first salvo in an escalating cascade of efforts by red states–including major fossil fuel producers, such as Texas and Oklahoma, which already have the statutory authority to do so–to penalize major companies that are adopting efforts to disengage from the fossil fuel industry (particularly coal production).  Several Republican-led states have been advocating these efforts, including Florida, where Governor DeSantis recently proposed that financial firms managing the state’s pension funds be prohibited from considering environmental factors when making investment decisions.”

Opinion

We would be wise to tread carefully in the goal of too quickly eliminating fossil fuels that power 80% of our economy.  Further, our carbon footprint in the United States peaked in 2006.  This progress in reducing greenhouse gases is credited in large part to the fracking revolution (not government intervention) that led to more natural gas that in turn reduced our need for coal.

Our global society, including importantly our ability to feed the growing population, is possible because of our ability to create inexpensive and increasingly cleaner energy.  We need balanced, common sense approaches for energy and all environmental issues.

This blog was drafted by Alan Hahn. Alan has an undergraduate degree in Environmental Studies and completed a graduate program in Environmental Management. He has worked in environmental management for 45 years.  He has written hundreds of blogs and articles. His published work includes Michigan Lawyers Weekly, Detroiter, Michigan Forward, GreenStone Partners, Manure Manager Magazine, Progressive Dairy, and HazMat Magazine.

The blog was reviewed by Jeffrey Bolin, M.S.  Jeff is a partner and senior scientist at Dragun Corporation.  He is a published author, frequent speaker, and expert witness.  His expertise in environmental due diligence, PFAS, vapor intrusion, and site assessments has led to projects in the US, Canada, and overseas. See Jeff’s Bio.  

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