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U.S. Securities and Exchange Commission (SEC) Commissioner Mark Uyeda spoke at the recent 2022 Cato Summit on Financial Regulation, where he addressed environmental, social, and governance (ESG) investing.
Uyeda, in his opening remarks at the summit held on Nov. 17, said a number of important questions were raised at the conference regarding ESG investing, according to a transcript of his remarks released by the SEC at the time. As well as asking what is ESG, Uyeda said attendees also consider what role ESG should play in investment decisions and whether ESG should be a factor in determining financial stability, according to the transcript.
The issue of the sustainability of ESG investing was addressed first by Uyeda, who said he was not using ESG and sustainability "as interchangeable terms. Rather, the terms are meant to ask whether ESG investing, in its current form, is itself sustainable.
"The asset management industry has excelled in recent years in attracting fund flows to ESG-themed investment products," Uyeda said, per the transcript. "Whether these trends can be sustained over the long run is an open question, especially if many ESG funds are essentialy plays on over-weighting the technology sector while under-weighting the energy sector."
Evaluating the net benefit of an ESG as a whole can be difficult as there can be disagreement on factors that make up the E, S, and G of the investment and how much importance the factor should be given, Uyeda said.
"For example," he said according to the transcript, "the Commission has a pending stock buyback rulemaking proposal. Should that disclosure be considered a “G” factor? Or an “S” factor? Or both? Or neither? Reasonable persons could reach different conclusions."
Uyeda said regardless of concerns about what comprises an ESG, "one aspect seems certain – there will be increased costs and these costs will be ultimately borne by investors." He cited fluctuating costs to companies of filing required documents with the SEC and pointed to an assumption by the SEC that compliance costs associated with the proposed climate-related disclosure would decrease after the first year, but said that assumption "may or may not be true."
"The SEC’s proposal permits the use of reasonable estimates," Uyeda said in his remarks, "but in the future, technology may be developed allowing for more precise capture of greenhouse gas (GHG) emissions that may entail additional costs. Furthermore, companies may have costs arising from other ESG obligations."
Uyeda said the current focus of a lot of ESG investing is on climate and greenhouse gas (GHG) emissions. He cautioned that could change in the future, shifting to "other disclosures, such as water-related metrics or other topics that are not currently contemplated."
"This ever-changing focus of ESG," Uyeda said, "combined with a lack of consensus on what constitutes ESG, could make it difficult for companies to decrease compliance costs over time."
The benefits are even more difficult to measure than the costs of ESG investing, according to Uyeda. He said results are mixed even when benefits are quantifiable, and referred to a study conducted by two Vanguard strategists which found that "ESG funds have neither systematically higher nor systematically lower raw returns or risk than the broader market."
Uyeda also highlighted a study conducted by a sustainability data firm, which found that "funds weighted towards companies with positive ESG scores outperformed the unweighted benchmark."
In his remarks, Uyeda noted his views on ESG investing and its possible risks "are my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners."
Energy Alliance policy director Bill Peacock wrote a letter to the SEC addressing his concerns about the impact of the Commission's proposed climate-related disclosures, saying that they could impose "unnecessary requirements on publicly traded companies that stand in opposition to decades of theory and practice related to securities regulation," therefore threatening "the interests of all Americans."
Peacock also stated that the proposed rule would increase compliance costs for all public companies by over $6 billion, bringing total compliance costs to $10.2 billion. He asserted that costs to businesses impact both said businesses and the economy as a whole.
"Not only will these costs reduce investment, employment, and economic growth, they are completely unnecessary," Peacock wrote. He also noted that the climate-related information that the SEC is seeking from companies is already available to investors, consumers, and other stakeholders, and emphasized that many publicly traded U.S. companies already voluntarily report ESG metrics and urged the SEC to allow Congress, the market, and the public to take part in the debate over the proposed rule.
According to Reuters, investing based on ESG principles slowed in 2022. From January through May, ESG funds brought in $7.5 billion, in comparison to $35 billion in the prior period. Investor surveys covering the topic achieved mixed results. A June survey conducted by both the Journal of Financial Planning and the Financial Planning Association found that 15% of financial advisors planned on decreasing their usage or recommendation of ESG funds over the course of 2023, compared to 4% who gave the same response in 2021. However, 28% of survey respondents said they planned on increasing usage, compared to 24% last year.