Environmental, social, and governance (ESG) scores are the latest instrument by which a diverse group of influential global elites and international organizations are attempting to fundamentally restructure the global financial system and alter traditional financial methods of assessing risk. This attempted shift from “shareholder capitalism” to “stakeholder capitalism” hinges upon assigning companies, and soon individuals, arbitrarily determined ESG scores that incorporate subjective and difficult-to-evaluate metrics assessing a firm’s commitment to climate and social justice issues.[1] Essentially, poorly scored companies receive lower ratings, and subsequently suffer from reduced access to capital, while highly scored companies receive substantial capital in-flows.[2] ESG’s metrics have ostensibly been designed to combat systemic global problems such as climate change, racial inequality, and world hunger—in alignment with the United Nations’ Sustainable Development Goals.[3] In reality, they instead centralize power and control in the hands of wealthy elites and globalist institutions, allowing them to dictate world affairs. Moreover, ESG metrics severely restrict economic and social opportunities for individuals and small businesses across the globe.
Below is a brief discussion of the role of the U.S. Securities and Exchange Commission (SEC) in coercing companies into ESG compliance.
SEC’s Mandate and Historical Role as Regulatory Authority
The SEC was established by Congress in 1934 as the first federal regulator of securities markets, as a response to the 1929 stock market crash that led to the Great Depression.[4] Though its original authority was more limited in scope, subsequent rulings by the U.S. Supreme Court have drastically expanded the agency’s mandate to regulate the economy. For instance, the SEC has the authority to “investigate corporate abuses, create administrative rulings, and make legislative recommendations,” among other expansions in regulatory oversight.[5]
According to the SEC, its mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”[6] The agency is led by a five-member commission, with members appointed by the president and confirmed by the Senate, and one commissioner designated as chairman. No more than three commissioners may belong to the same political party.[7] The SEC’s current chairman is Gary Gensler, who was sworn into office in April 2021 after being appointed by President Biden and confirmed by the Senate.[8]
SEC’s Proposed Rule Change Related to ESG Disclosures
As the U.S. financial system and regulatory agencies under the Biden administration have become increasingly infused with ESG practices, the SEC has followed suit. On May 25, 2022, the SEC Commission, in a party-line vote led by Chairman Gary Gensler and his two colleagues from the Democratic Party,[9] approved two proposed rules related to mandatory ESG disclosures.[10] The new mandates have far-reaching implications. [11]
The first rule, “ESG Disclosures for Investment Advisers and Investment Companies,”[12] requires ESG disclosures for all registered investment companies, business development companies, and investment advisers in their fund prospectuses, annual reports, and adviser brochures. It also requires environmentally focused funds to disclose greenhouse gas emissions related to portfolio investments.
The second rule, “Amendments to the Fund ‘Names Rule,’”[13] reinforces the first. It expands the requirements for certain funds to adopt policies to invest at least 80 percent of their assets in accordance with the investment focus the fund promotes, while enhancing reporting and recordkeeping requirements.[14]
Impact of Proposed Rule Change on U.S. Financial Community
There is substantial debate over whether the SEC operated within its legal authority, specifically related to if the SEC can only rule on material financial impacts, or if the SEC’s scope is broader.[15] Whatever the case, the SEC’s new rules directly subvert the mission it promotes, in terms of both “protecting investors” and maintaining “fair, orderly, and efficient markets.”
The driving goal of ESG is to promote investment in companies that adhere to subjective metrics that have not been established by any popular democratic process. Instead, these metrics have been determined by a powerful conglomerate of asset management firms such as BlackRock, Vanguard, and State Street; financial institutions such as JP Morgan Chase and Bank of America; insurance titans such as AXA, Allianz, and Zurich; international organizations such as the United Nations and the World Economic Forum; and governmental regulatory authorities such as the SEC.[16]
Rather than protecting investors and free markets, the SEC’s new rules erode both principles by forcing companies to make decisions based upon subjective social goals that inherently run counter to the natural law of supply and demand. The SEC is one of the chief regulatory agencies attempting to undermine traditional free-market capitalism in favor of stakeholder capitalism. Any attempts to frame these new mandates as anything other than an attempt to centralize market control in the hands of a powerful few are intentionally misleading, and should be approached with extreme skepticism.
[1] For more information, see: Justin Haskins and Jack McPherrin, “Understanding Environmental, Social, and Governance (ESG) Metrics: A Basic Primer,” The Heartland Institute, January 26, 2022, https://www.heartland.org/publications-resources/publications/understanding-environmental-social-and-governance-esg-metrics-a-basic-primer
[2] Mark Bergman et al., “Introduction to ESG,” Harvard Law School Forum on Corporate Governance, August 1, 2020, https://corpgov.law.harvard.edu/2020/08/01/introduction-to-esg
[3] United Nations, “Sustainable Development,” Department of Economic and Social Affairs, accessed July 12, 2022, https://sdgs.un.org/goals
[4] Investopedia, “Securities and Exchange Commission (SEC),” Retrieved August 12, 2022, from https://www.investopedia.com/terms/s/sec.asp
[5] Securities and Exchange Commission Historical Society, “William O. Douglas and the Growing Power of the SEC: Broadening the SEC Mandate,” Retrieved August 15, 2022, from https://www.sechistorical.org/museum/galleries/douglas/broadeningMandate.php
[6] U.S. Securities and Exchange Commission (SEC), “About the SEC,” Retrieved August 15, 2022, from https://www.sec.gov/about.shtml
[7] SEC. “Current SEC Commissioners,” Retrieved August 15, 2022, from https://www.sec.gov/Article/about-commissioners.html
[8] SEC, “Biography: Gary Gensler,” Retrieved August 15, 2022, from https://www.sec.gov/biography/gary-gensler
[9] Kirkland & Ellis, “SEC Proposes Pair of Long-Awaited ESG Rules; Non-ESG Funds Swept Up as Well,” June 3, 2022, https://www.kirkland.com/publications/kirkland-alert/2022/06/sec-proposes-two-new-esg-rules-for-funds
[10] SEC, “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices,” Press Release, May 25, 2022, https://www.sec.gov/news/press-release/2022-92
[11] Maia Gez et al., “SEC Proposes Amendments to Rules to Regulate ESG Disclosures for Investment Advisors & Insurance Companies,” White & Case, June 13, 2022, https://www.whitecase.com/insight-alert/sec-proposes-amendments-rules-regulate-esg-disclosures-investment-advisers-investment
[12] SEC, “ESG Disclosures for Investment Advisers and Investment Companies,” Fact Sheet, Retrieved August 15, 2022, from https://www.sec.gov/files/ia-6034-fact-sheet.pdf
[13] SEC, “Amendments to the Fund ‘Names Rule,’” Fact Sheet, Retrieved August 15, 2022, from https://www.sec.gov/files/ic-34593-fact-sheet.pdf
[14] For a more in-depth analysis of these rules, see: Maia Gez et al., “SEC Proposes Amendments to Rules to Regulate ESG Disclosures for Investment Advisors & Insurance Companies.”
[15] For a more in-depth analysis of this debate, see: Alexandra Thornton and Tyler Gellasch, “The SEC Has Broad Authority To Require Climate and Other ESG Disclosures,” American Progress, June 10, 2021, https://www.americanprogress.org/article/sec-broad-authority-require-climate-esg-disclosures/
[16] For more information about these companies and their integrative approach, see: Justin Haskins and Jack McPherrin, “Understanding Environmental, Social, and Governance (ESG) Metrics: A Basic Primer,” and Glasgow Alliance for Net Zero, “Membership,” Retrieved August 15, 2022, from https://www.gfanzero.com/membership/
Jack McPherrin ([email protected]) is a managing editor of StoppingSocialism.com, research editor for The Heartland Institute, and a research fellow for Heartland's Socialism Research Center. He holds an MA in International Affairs from Loyola University-Chicago, and a dual BA in Economics and History from Boston College.
