Last week, SEC Commissioner Uyeda delivered an address in which he "focus[ed] on issues related to asset managers' use of environmental, social, and governance (ESG) investment strategies." While his talk addressed many aspects of ESG investing, including "[t]he [g]rowth of ESG [i]nvesting," the thrust of his talk concerned "three factors" that "complicated" "ESG investing." Specifically, these factors were defined as:
(1) "[T]he inability to objectively define 'ESG' or any of its components."
(2) "[T]he temptation . . . [for] regulators . . . [to] favor specific ESG goals or objectives."
(3) "[T]he desire of certain asset managers to use client assets to pursue ESG-related goals without obtaining a mandate from clients."
As can be gleaned from a cursory review of these factors, Commissioner Uyeda appears to be fairly skeptical of ESG investment strategies, at one point opining "that some ESG products are merely offered in order to extract higher management fees." Leaving aside individual criticisms of various actions or proposals undertaken by ESG-focused investors or investment strategies, however, the overall thrust of Commissioner Uyeda's argument is that the SEC's proposed rulemaking with respect to ESG issues--the focus of substantial attention by both regulators and commentators over the past year--is unnecessary because "the federal securities laws already have standards in place" and that "full and fair disclosure" is already required by the relevant regulatory framework.
But Commissioner Uyeda's speech is not simply a re-hashing of conservative complaints about ESG investing. Instead, it serves as a road map for arguments--both legal and otherwise--likely to be advanced in the courtrooms and Congress against any further attempts to increase the salience of ESG factors. Such arguments include that ESG rulemaking by the SEC could run afoul of "the major questions doctrine in the manner set forth in West Virginia vs. EPA," or that ESG investing could impact the fiduciary duty owed by investment managers to their clients, or that ESG involves political value judgments that should not be decided by regulators nor investment managers. Indeed, Commissioner Uyeda expressly invokes politics, noting that "[p]ursuing a particular ESG strategy can involve choosing social and political causes" and that "[t]here is a reason that changes affecting broad swaths of society are best left to elected officials, accountable to the voters, and not unelected persons like regulators or asset managers."
This speech is the latest salvo against the use of ESG factors by investment managers, and features many arguments favored by conservative opponents of ESG investing. It is therefore useful in telegraphing some of the expected political tactics and legal arguments that proponents of ESG investing can expect to encounter over the next several months.
Despite the fanfare around ESG investing, there are many questions on what it encompasses. Because “ESG” can mean different things, complying with the federal securities laws requires that asset managers describe precisely what they mean when they offer an ESG fund or product. In that regard, the existing regulatory framework is well suited to guide the conduct of investment advisers. Any emerging regulations should be careful not to tip the scale in favor of any particular political or social cause, and adherence to the established framework of focusing on financial materiality will continue to serve investors well.