Commissioner Uyeda Discusses ESG In Depth | SEC Releases
SEC Releases
Brief Introduction
SEC Commissioner, Mark Uyeda, made multiple remarks on January 27th related to the use of environmental, social, and governance (ESG) investing.
He addressed the following below:
- Growth of ESG Investing;
- Fiduciary Duty of Investment Advisers;
- Definition of ESG;
- Favoring of ESG Investing; and
- Activism by Asset Managers.
This is a summary of his remarks, which are his personal remarks and do not reflect the opinion of the SEC.
For those that are involved in ESG, this will be most applicable for you.
Comments on Growth of ESG Investing
- Global ESG assets expected to exceed $50 trillion by 2025.
- With higher fees, ESG-themed funds had a global revenue of approximately $1.8 billion in 2021.
- Growth in ESG has incentivized the use of this label, making it difficult for investors to understand how many assets under management are truly ESG.
- SEC rules have been designed to address the issue of investment adviser marketing to clients and potential clients.
Comments on the Fiduciary Duty of Investment Advisers
- Advisers can only pursue ESG investment strategies if their clients express a desire for ESG investing after being given full and fair disclosures about the risk and return profiles.
- It has always been acceptable for advisers to choose strategies that focus on the non-financial objectives of their clients.
- When advisers fail in their fiduciary duty, they have been subject to SEC enforcement action.
- A regulatory approach is suggested that handles ESG investing like any other defined investment strategy; there is a well-established framework to use instead of creating a new regulation specific to ESG.
Comments on Defining ESG
- There is incredible difficulty in defining ESG; there are varying opinions on which objectives constitute ESG and which investment products actually contribute to these goals.
- ESG has political and social objectives, which can vary so wildly among stakeholders that a standardized ESG measure would be doomed to fail.
- The two largest credit rating agencies issue the same rating 78% of the time, and are within one letter grade more than 99% of the time. ESG ratings firms agreed only 18% of the time.
Comments on Regulator Favoring of ESG
- There is a major concern that ESG rating services would force firms to comply to the political or social agenda of the rating services, which goes far beyond what makes an acceptable financial analysis tool.
- Some regulators had attempted, with backlash, to allow for ESG considerations to be materially relevant to the financial fiduciary responsibility.
- There is a possibility that ESG regulations could implicate the major questions doctrine which would be putting regulators outside their Constitutional authority.
Comments on Activism by Asset Managers
- Some asset managers attempt to walk the fine line between their fiduciary responsibility and furthering individual social/economic goals.
- The use of proxy voting and filing beneficial ownership reports on Schedule 13G by asset managers is suspect.
- Regulators and asset managers, who are unelected, are wading into areas best left for elected officials.
Vigilant’s Final Conclusion
For those that are involved in ESG investing, this adds another layer to adequate compliance.
It is vital that firms are aware of the labels they use when advertising investment products.
Proper and full disclosures would be expected when this term is being applied to investment strategies. If you have any concerns about how ESG may be incorporated into future regulation, please reach out to us.