SEC Disbands ESG Task Force Amidst Setbacks And Growing Corporate Priorities‌ ‌

The Securities and Exchange Commission (SEC) confirmed Sept. 12 that it shut down its ESG task force. The task force was first established in 2021 to bring lawsuits against companies that made misleading ESG claims.

The SEC has quietly disbanded a group of enforcement lawyers who helped bring litigation fighting misleading environmental, social and governance disclosures for more than three years.

The Securities and Exchange Commission shut down its Enforcement Division’s Climate and ESG Task Force within the past few months, an agency spokesperson told Bloomberg Law Thursday.

Public companies may be slowing investment in proactive regulatory compliance activities as most of the SEC’s ESG rules remain unfinished or stuck in the courts according to Lawrence Cunningham, the incoming director of the University of Delaware’s Weinberg Center for Corporate Governance:

Despite Gensler’s ambitious ESG agenda over the past three years, many of his proposals remain unresolved. As we approach the election, the ESG movement appears to be weakening.

Gensler’s aggressive approach involved pushing boundaries of the SEC’s statutory authority and minimizing the traditional administrative rulemaking process. This strategy led to significant setbacks, including invalidating the stock buyback rule and the failure to repeal a compromise on proxy adviser rules from Gensler’s predecessor, Jay Clayton.

The SEC’s approach underestimated the headwinds facing the ESG movement. Despite initial enthusiasm, funds flowed out of ESG investment vehicles as returns failed to meet expectations. A 2022 meta-review of 1,400 studies found that ESG investing’s financial performance was, on average, indistinguishable from conventional investing.

Missouri Secretary of State Jay Ashcroft (R) on Sept. 13 appealed the recent federal court decision that invalidated two of the state’s anti-ESG investing rules, published last year.

Ashcroft asked the US Court of Appeals for the Eighth Circuit to review a federal judge’s August decision barring Missouri from enforcing the 2023 rules, according to a notice of appeal.

The regulations require investment firms to obtain written consent from their Missouri customers before using any “social objective or other nonfinancial objective” in their decisions.

ESG and sustainability have become lower corporate priorities, according to a recent Bain & Co. survey. Companies are more focused on inflation, AI, and geopolitical issues. 

In 2019, when Morgan Stanley announced its plastics goals, the firm used billboards on its Times Square headquarters to amplify the pledge. Once seen by the C-Suite as an asset in a world where making nods toward sustainability was good business, ESG has since become a liability in the eyes of executives fearful of right-wing blowback and the grim cocktail of lingering inflation and elevated interest rates.

Indeed, a survey released this week by Bain & Co. found sustainability has dropped down the list of top priorities for chief executives. Instead, CEOs are more concerned about inflation, artificial intelligence and geopolitics.

Relatedly, a recent Bloomberg Intelligence analysis said most US companies have “significantly scaled back” discussions of ESG and similar topics on quarterly earnings calls. And for those whose goals appear increasingly out of reach, the temptation to keep quiet is even greater.

The American Institute for Economic Reform published a book review Sept. 13 of Ending ESG—a collection of essays about ESG, edited by former BlackRock adviser Terrence Keeley and former U.S. Senator Phil Gramm (R). 

The book review’s author, Russ Greene—an ESG critic and senior fellow for the economy at Stand Together Trust—summarizes the arguments throughout the essays and adds commentary about ending ESG. Greene argues that corporations should avoid political and ideological neutrality and instead actively oppose subsidies, regulations, and shareholders who promote ESG business practices. His argument differs from those of other ESG critics who argue companies should keep politics out of business.

To survive, businesses cannot merely conform to the basic rules of society — they must influence them. But how, and in which direction? For example, should they oppose crony subsidies and regulations, which may help their profits, at least in the short term, but undermine economic dynamism and the very legitimacy of their businesses? Friedman’s positivism does not provide much guidance here.  

After all, the ethical customs and laws of a society may grow increasingly hostile to private enterprise. Indeed, they seem to be doing so now. Business leaders cannot be expected to stand by as activists assault the legal and ethical foundations of economic progress, or as government agencies violate their constitutional rights. While Ending ESG recommends that business leaders “keep politics out of the boardroom,” this is no longer an option for major corporations, if it ever was.

Moreover, activist shareholders increasingly are advancing shareholder proposals that are harmful to the long-term interests of the very corporations in which they own shares. This means businesses increasingly have to defend themselves against their own shareholders. Complicating matters further, the nature of business ownership has radically changed since 1970, with the rise of passive index investors and pension-fund activism. It’s no longer safe to assume that major investors will all agree on maximizing the long-term value of a particular firm, especially if that firm is engaged in ESG-unfriendly lines of business. What most investors do, and should, prioritize is very much up for debate.

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