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Caitlin Styrsky

Proposed labor rule defining requirements for investment advisers receives more than 5,000 comments

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In Washington, D.C.

Proposed labor rule defining requirements for investment advisers receives more than 5,000 comments

The Biden administration on November 3 released a proposed rule aiming to expand the definition of a fiduciary—someone who must act in the best interests of their clients—to include more types of financial professionals in certain situations. The proposal had received more than 5,000 public comments as of December 11. 

The rule is related to Ballotpedia’s coverage of issues related to environmental, social, and corporate governance (ESG), which, in the context of public policy, includes discussions of what types of investments are in the best interests of investors and who must act as a fiduciary.

The proposed definition would require—at the federal level—that insurance agents, brokers, and other financial advisors must, in certain circumstances, act as fiduciaries for individual investors. The proposed definition would also require them to avoid advising individuals on matters that present a conflict of interest (such as when an adviser or insurance agent might collect a larger commission for selling a product that would not maximally benefit the investor). 

The proposal would only apply when, in the Department of Labor’s (DoL) view, an individual investor might “reasonably place trust and confidence in the financial services provider.”

The current federal definitions were created in the 1974 Employee Retirement Income Security Act (ERISA). According to ERISA, federal fiduciary requirements primarily apply to employer-funded pension plan managers and plan advisers. The requirements do not apply to many types of individual investment advisers.

Supporters of the proposal say it would protect individual investors from bad advice, junk fees, and exploitative financial advisors. Opponents say it would overstep the DoL’s authority, overregulate the financial advisory industry, and prevent lower- and middle-income investors from getting good advice.

The Department of Labor is accepting comments on the proposal until Jan. 2, 2024.

House Judiciary Committee subpoenas Vanguard and Arjuna Capital

As part of its ongoing investigation into ESG and antitrust compliance, the House Judiciary Committee on December 11 issued subpoenas to Vanguard (the second-largest asset management company in the world and the largest passive manager) and Arjuna Capital. Influence Watch describes Arjuna as a “left-of-center investment firm based in Durham, North Carolina that specializes in activist investment strategies in environmentalist and social justice causes.” According to the committee, the two firms have not provided adequate responses to previous inquiries:

The Judiciary Committee wants documents and communications from the investment firms related to how they “advance ESG policies,” according to letters from committee Chairman Rep. Jim Jordan, R-Ohio.

In each of the letters, Jordan wrote that the firm, “appears to have entered into collusive agreements to ‘decarbonize’ its assets under management and reduce emissions to net zero in ways that may violate U.S. antitrust law.”

Arjuna is part of Climate Action 100+, a coalition of about 700 global investors that represent more than $68 trillion in assets, according to the group. Arjuna also participates in the Net Zero Asset Managers Initiative. Vanguard was in the initiative but left in December 2022, but that didn’t stop the committee from including it in its investigation.

SEC climate and brokerage disclosure rules now expected in April

The Securities and Exchange Commission’s final rule on climate disclosures for publicly traded companies is now expected in April of next year, as is the commission’s rule on disclosures for investment advisors using the ESG label, according to a Wealth Management report.

The SEC could unveil the final versions of dozens of its rules as early as April, according to the White House Office of Management and Budget. The potential final rules include those restricting conflicts for brokers using AI and other data tools, as well as ESG disclosures for investment advisors. …

In addition to SEC rules on “predictive data analytics” and ESG disclosures for advisors, the OMB lists the commission’s oft-delayed rule to standardize climate-related disclosures for issuers as having a tentative April 2024 date for its “final action.” …

The ESG disclosure rules for advisors purports to take on “greenwashing” in the space. By mandating disclosures, the commission hoped to assist investors in discerning which funds and advisors are more serious about ESG-related issues, and which are merely co-opting the terminology for advertising.

In the states

South Carolina announces plan to divest Disney stock

Disney has faced pushback from ESG opponents. In his book The Dictatorship of Woke Capital, ESG critic Stephen Soukup argued that Disney and its CEO Bob Iger were too involved in political and social debates in several American states and did not push back sufficiently against the Chinese Communist Party. Soukup criticized Disney for opposing a bathroom bill in North Carolina and an abortion bill in Georgia while also filming movies in China’s Xinjiang province where Muslim Uighurs are held in detention camps and perform forced labor.

More recently, Disney and Iger have clashed with Florida Governor Ron DeSantis over state laws and the company’s tax benefits.

Now, the state of South Carolina will be divesting its Disney holdings in response to the company’s public decision to boycott advertising on X/Twitter. South Carolina Treasurer Curtis Loftis (R) called Diseny’s decision a breach of fiduciary duty:

South Carolina state Treasurer Curtis Loftis announced on Tuesday that Walt Disney Company is being removed from the Palmetto State’s approved investment list. In a letter, he argued that Disney has abandoned its fiduciary duty to investors by “boycotting” X.

Loftis’s office portfolio has about $105 million of Disney debt instruments that will mature as scheduled and will not be replaced, according to the treasurer. Loftis said he will focus on the equity portfolio in the coming weeks.

“Disney has abandoned its fiduciary responsibilities to its investors and customers by joining far-left activist in boycotting legal, taxpaying, employment-creating corporations to further Disney’s political agenda,” he said in a Tuesday statement.

In the spotlight

ESG supporters push back against the pushback

As the pushback against ESG continues, supporters of the investment strategy and other environmental activists are arguing in favor of ESG engagement and their own ESG practices.

ShareAction, an ESG advocacy group, has called on asset managers to escalate their engagement strategies with corporations over ESG. The group says its research shows that most asset managers do not escalate after initial pushback, which renders ESG engagement ineffective:

In its second guidance paper in its Responsible Investment Standards and Expectations (RISE) series, ShareAction said it was difficult to see how, and to what extent, asset managers are escalating with their investee companies after the NGO reviewed stewardship and sustainability reports of 50 of the world’s largest asset managers. These revealed limited disclosure on the use and outcomes of escalation, ShareAction said.

Escalation, the report said, is critical as if firms do not act when their engagement is not working, firms will accept there is no consequence attached to them failing to respond appropriately to investor concerns. Recent research from Redington also revealed asset managers’ hiring for engagement and stewardship roles has come to a standstill while engagement progress is stalling in many parts of the industry with 30% of companies unable to evidence that ESG is driving specific changes. Similarly, this month, the Financial Conduct Authority said it had found stewardship activities in the UK are not meeting sustainability guiding principles and said “stewardship approaches generally did not meet our expectations”.

Meanwhile, Myriam Vander Stichele, a Senior Researcher at SOMO, “the Centre for Research on Multinationals” in Amsterdam, recently responded to a Financial Times piece on the impact of the ESG pushback. Stichele criticized corporations and investors for, in her view, seeking profits over environmental stewardship:

One way to measure [the impact of the ESG backlash] is by looking at the financial benefits some investors have reaped from the five big listed oil companies that now openly argue that renewable energy investments are not profitable enough.  They reduced RE investments while increasing oil production, after spending $316.7bn on dividends and $110.9bn on share buybacks during 2016-2022 (more than their profits).

Shareholding asset managers not only vote but also engage to increase the earnings per share — supporting fewer ESG resolutions and only assessing where financial value is at risk from climate in the short term. Since the Paris agreement, asset managers and their clients enjoyed high returns from not investing in RE: five listed oil companies paid dividends worth at least $21.4bn to BlackRock, $16.7bn to Vanguard, and $11.3bn to State Street Global Advisors, and indirectly to asset managers’ clients.

Money not invested in a just transition affects the physical world and, in the long term, stranded assets.

Finally, Larry Fink, the CEO of BlackRock, the world’s largest asset manager and a supporter of ESG, responded to criticism of his company in the recent Republican presidential debate with a post on LinkedIn. Fink wrote:

Now I know why they call this the political silly season. Last week, the Washington Post factchecker awarded Robert F. Kennedy Jr. four “Pinocchios” for the misinformation he’s been peddling about BlackRock in his presidential campaign. Last night, candidates in the Republican primary debate earned a few more Pinocchios.

One candidate last night claimed that BlackRock was somehow deterring American energy companies from drilling for oil. The reality: BlackRock clients have more than $170 billion invested in American energy companies and just last month, we announced a joint venture with one of America’s largest energy companies to help develop new technology.

Another candidate accused BlackRock of pursuing an ideological agenda. The only agenda we have is delivering for our clients. We’ve been entrusted to manage more assets than any other company in our industry because we have a track record over more than thirty years of managing retirement savings, and we do so for 35 million Americans today. We’re proud of that record. We’re proud to be an American success story.

Ben Geman, writing for Axios, the short-form political website, argued that Fink’s response showed that he, in Geman’s view, is concerned about the impact that the political pushback against ESG is having on his firm and his reputation:

Quick take: Fink sees anti-ESG policies from the political right — which target his firm and others — gaining enough traction that he felt compelled to respond. …

The bottom line: Fink wrote that “I know why they call this the political silly season,” but he appears to be taking attacks seriously. 

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