By Joseph Chalfant
On July 6, the Competitive Enterprise Institute (CEI) hosted a discussion on developments in Environmental, Social, and Governance (ESG) Investing.
The hour-long event consisted of a panel of three experts: Justin Danhof, Esq., The National Center for Public Policy’s Free Enterprise Project Director, Cato Institute’s Director of Financial Regulation Studies Jennifer Schulp, and National Review’s Capital Matters editor Andrew Stuttaford. CEI Free Enterprise Research Fellow Richard Morrison moderated the talk.
Right-leaning experts are concerned that the US Securities and Exchange Commission (SEC) is gearing up to implement policies, specifically an increase in disclosures regarding social issues, that can be weaponized to shift corporate behavior. They believe that the shift would amount to compelled speech, as seen in the National Association of Manufacturers v. SEC concerning Dodd-Frank.
Donhof and Schulp labeled the effort as a “name and shame game.” They suggested that the Biden administration and the SEC are set on a path to promote “woke capital” over material gain for shareholders and investors. Morrison suggested that the definitions for what could qualify ESG may mean that almost anything could fall under a regulatory umbrella.
Donhof does not believe that progressive activism in corporations will stop anytime soon. He noted that climate activists successfully managed to encourage companies to commit to carbon neutrality decades into the future and have succeeded in incrementally moving their pledged date up over time. He believes that this same strategy could be implemented to shift corporate behavior on other issues.
“Once you get the company to commit to X, then you have to commit to Y and Z, then you start the whole thing all over again,” said Donhof.
Donhof also noted there is a similar market for those wanting to engage with businesses promoting conservative social values. He pointed to the emergence of the 2ndVote exchange-traded funds (ETF) that invest into pro-life and pro-Second Amendment companies and have seen some success.
Donhof maintained that there will always be a market for companies that maximize profits to the benefit of shareholders.
Schulp noted that social awareness investing was not a new phenomenon in American finance. She said that today’s activists follow a similar trend to those of the 70s and before but are no longer suggesting to investors that there is a trade-off between maximizing profits and practicing social awareness.
Morrison commented that restrictions might force more companies to stay private and suggested that a similar trend occurred after the implementation of Dodd-Frank. Schulp echoed that concern and noted that ESP proponents have suggested that even private companies be required to submit ESG disclosures after they’ve surpassed a certain capital threshold.
Stuttaford and Schulp said that efforts to fight against ESG would come from shareholder civil lawsuits against companies dropping assets undervalue to increase their ESG rating and through First Amendment lawsuits that were similarly used against Dodd-Frank. Schulp believes that there will “undoubtedly be litigation” once the SEC finalizes its rules.
The panelists collectively agreed that the agency comment period was the best opportunity for concerned individuals to give their thoughts on the proposal. Because of the SEC’s insistence on crowdsourcing information, Schulp encouraged panelists to submit comments so the agency can “hear from the crowd.”
The SEC opened a comment period for questions regarding ESG disclosures on March 15. Activists and experts have engaged in debates over what exactly a rule change proposal may look like and expect an answer on climate disclosures by the end of 2021.