Zach C. Cohen
Thu, August 11, 2022
(Bloomberg) -- To Blake Masters, the newly minted Republican Senate nominee in Arizona, ESG scores are an existential threat to the US economy along with inflation -- an issue worth campaigning on as ardently as securing the border, preventing voter fraud and challenging Big Tech.
“They represent a further merger of government and corporation,” Masters said, comparing ESG scores to the tactics of the Chinese Communist Party in a statement to Bloomberg Government on Wednesday. “These scores have absolutely no place in our country.”
Masters’ advocacy is part of a growing movement among Republicans to make ESG scores -- the grading of companies’ performance based on their environmental and societal effects, as well as their governance structure -- a cultural issue alongside Democrats’ social justice and environmental advocacy. Those Republicans could seek legislative avenues to limit use of the scores if they take control of the next Congress.
Masters, who’s challenging Sen. Mark Kelly (D) in one of the most competitive Senate races in the country, has blasted ESG scores at least 10 times on the campaign trail in recent months, according to audio and video recordings of Masters’ speeches reviewed by Bloomberg Government.
“I think we need to ban ESG scores,” Masters told the City of Maricopa Republican Club last month. “And that’s my pledge to you. We’ll try to figure out how to do it.”
Addressing the Mohave County Republican Committee Picnic last month, Masters called ESG scores one of the country’s “new and modern threats.” In May, he warned the SaddleBrooke Republican Club of ESG scores as “new stuff coming across the transom” worthy of conservatives’ attention.
“We have to not just defend against this stuff, because we’ll lose,” Masters told a July meeting of Sedona-based conservatives called Citizens for America. “We have to affirmatively take back from the left.”
Effort in Congress
If elected, Masters could seek to limit the incentives for companies to value factors other than their bottom line.
The Securities and Exchange Commission, which has oversight of some firms that offer ESG scores and a Democratic chairperson, is unlikely to ban the scores or severely restrict firms that offer them. But a Republican-controlled Congress could pressure the agency to ramp up its scrutiny of the ratings or stop it from taking actions to encourage ESG scores, which socially conscious investors use to compare companies.
ESG scores have been around for about two decades but only attracted negative political attention more recently. One of ESG’s most prominent critics is Republican megadonor Peter Thiel, who is backing Masters’ campaign. Masters’ refrain on the campaign trail may be replicated by other like-minded candidates.
Masters started speaking against ESG on the campaign trail after Thiel railed against the scores at a Bitcoin conference in April.
At the conference, Thiel, for whom Masters worked as COO and who funds a pro-Masters super PAC, called ESG “the real enemy” of the biggest cryptocurrency in a market that’s largely escaped government regulation. Cryptocurrencies, which largely escape government regulation, tend to receive low scores because of their electricity demands for production.
“ESG is just a hate factory, it’s a factory for naming enemies,” Thiel said. “We should not be allowing them to do that.”
Days later, Masters, who along with his wife owned at least $1.5 million worth of cryptocurrency as of his latest personal financial disclosure last fall, began raising ESG scores on the campaign trail. He promised Fox News in April that he would “ban ESG scores” as well as “wokeness in the Fortune 500.” He made similar comments to Fox News again in May and when he appeared on the podcasts of conservative radio hosts Steve Bannon, Jesse Kelly, Mike Russell, and Rob Hunter.
Legislative Avenues
Republicans have turned back a Labor Department nominee in protest of the Biden administration’s advocacy for prioritizing ESG in retirement investing. Sen. Bill Hagerty (R-Tenn.), a member of the Banking Committee, recently asked the SEC to bar its recent former employees from helping companies comply with new ESG regulations.
Lawmakers have also used legislation that funds the SEC to discourage ESG rulemaking. The agency for years has been subject to appropriations bills that have barred it from creating rules that would force companies to disclose their political spending.
Other lawmakers have sought standalone measures, such as Rep. Troy Nehls’ (R-Texas) bill that would bar requirements that publicly traded companies disclose or provide greenhouse gas emissions (H.R. 8507).
At a primary debate hosted by FreedomWorks, Masters used his opposition to ESG scoring to set himself apart from his opponents, calling himself “the only candidate that understands and is addressing the new and modern threats we face.”
“Pretty soon, you watch, we’re going to have a young and dynamic America First caucus in the US Senate,” Masters said. “We’re going to change the way that place works.”
Masters told the City of Maricopa Republican Club that he’s already made inroads with one of Congress’ most strident ESG opponents, discussing with Sen. Tom Cotton (R-Ark.) ways to hamper ESG scores. Cotton last week declined to comment on his conversations with Masters, and a spokesperson didn’t respond to a request for comment.
ESG raters operate in a gray regulatory area. The US doesn’t have specific rules for ESG scores.
Firms that provide credit rating services are required to register with the SEC and make disclosures about their activities in an effort to root out fraud. These firms include Moody’s Corp. and S&P Global Inc., which offer traditional credit ratings along with ESG scores. But ESG score providers such as MSCI Inc. aren’t required to register with the SEC under credit rating agency rules.
SEC examiners earlier this year reported they’ve seen potential conflicts of interest and other risks at credit rating agencies that provide ESG products. The agency also has warned investors to be cautious about considering ESG scores when investing.
(Bloomberg LP, the parent company of Bloomberg Government, offers sustainability ratings and data. Additionally, Bloomberg has a partnership with MSCI to create ESG and other indexes for fixed-income investment.)
Recent SEC Enforcement Hints at Looming Crackdown on ESG Claims
The U.S. Securities and Exchange Commission headquarters in Washington, D.C., U.S., on Wednesday, Feb. 23, 2022.
Photographer: Al Drago/Bloomberg
Aug. 10, 2022, 3:00 AM
A new SEC task force to police corporate environmental, social and governance disclosures is gradually ramping up enforcement, putting companies on notice.
The Securities and Exchange Commission created its Climate and ESG Task Force a year and a half ago. The unit has mostly kept working behind the scenes. But in the last four months, it has helped bring at least three enforcement actions, according to agency records.
Companies that have faced allegations of misleading ESG claims include
The SEC is working on new rules to combat bogus ESG claims by investment funds and to force companies to disclose how climate change affects their operations. New rules or not, SEC Chair Gary Gensler is facing pressure from Democrats and investor advocates to guard against misleading corporate disclosures about climate change and other ESG issues.
The task force’s actions, which started to become public this spring, are likely just the beginning, with more cases expected soon, corporate lawyers told Bloomberg Law. SEC investigations often take more than a year to complete, they said.
The SEC’s fiscal year-end in September traditionally brings a flurry of cases, said Kevin Muhlendorf, a Wiley Rein LLP partner and former agency lawyer, who advises companies on ESG matters.
“I don’t think it’s all bark and no bite,” Muhlendorf said of the task force. “Anytime you create one of these task forces, there’s going to be actions.”
More enforcement actions also may come with help from the SEC’s Divisions of Corporation Finance and Examinations. The units are busy reviewing company disclosures and investment firms with an eye on what’s said about ESG, said Amy Greer, a former SEC lawyer and co-chair of Baker & McKenzie LLP’s North American financial regulation and enforcement practice. The staff in the units can send information about potential wrongdoing to the SEC’s Enforcement Division, which must use existing rules to bring ESG cases since the new regulations are still not in place.
“The fact that things are not out there for public consumption in a meaningful way does not mean that the regulated community does not have the message because it does,” she said.
An SEC spokeswoman declined to comment.
‘Stepping Up’
The SEC is investigating claims the banking giant’s funds didn’t align with ESG metrics touted in marketing material, Bloomberg News reported in June.
The report came after the agency announced in May that BNY Mellon agreed to pay $1.5 million to settle claims of ESG misstatements concerning its funds, without admitting or denying any wrongdoing.
Former Acting SEC Chair Allison Lee launched the task force with 22 members in March 2021, as newly empowered Democrats and investor advocates pushed to put ESG at the top of the agency’s agenda. The SEC soon after told fund managers it saw problems with how they handled ESG issues.
The task force was directed to find public companies that dupe investors about their environmental risks or engage in other ESG-related misconduct.
The agency credited the task force for assistance in bringing lawsuits against Benefytt and Vale.
“I’m pleased to see the talented staff in the ESG Task Force stepping up its efforts to help the Enforcement Division combat fraud in this growing space,” said Lee, who left the SEC in July.
Quantity v. Quality
Some corporate lawyers told Bloomberg Law they question whether the task force is fully living up to its expectations.
A July SEC order settling the Benefytt case didn’t mention ESG. The only reference to ESG came in a press release that said the task force assisted with the matter.
Benefytt and its former CEO, Gavin Southwell, hid tens of thousands of consumer complaints from investors when it was a public company known as Health Insurance Innovations Inc., the SEC said.
Southwell and Benefytt agreed to pay more than $12 million to resolve the matter, without admitting or denying any wrongdoing.
Greer, who represented Benefytt, said the task force’s involvement with her client’s case was a “head-scratcher.” She said she hopes the SEC focuses more on cases that have what she sees as stronger links to the space.
“Don’t go for quantity over quality in an area that’s this important to you,” Greer said.
The SEC was more explicit about ESG-related allegations in its complaint against Vale filed in April.
The iron ore producer deceived investors about the safety of its dams before one collapsed in 2019, the SEC said in the complaint. The collapse killed 270 people and caused “immeasurable environmental and social harm,” according to the complaint. Company sustainability reports and ESG webinars claimed safety auditors hadn’t found any problems with its dams, the SEC said.
Vale has disputed the allegations. The case is pending in the U.S. District Court for the Eastern District of New York.
Few Tools
The SEC has few tools designed to bring ESG cases. No rules specifically ban misleading or incomplete ESG disclosures.
The agency invoked broad antifraud laws to help bring cases against Benefytt, Vale, and BNY Mellon. The SEC also has climate disclosure guidance at its disposal. The 2010 guidance reminds companies to make disclosures about climate change, if material to their businesses.
But the SEC’s proposed ESG rules may give the agency more ammunition. Some rules, which could be finalized in the fall, would require companies to report their greenhouse gas emissions and make other climate disclosures. Other rules also in development would require ESG-focused funds to have at least 80% of their assets aligned with that strategy.
“What the rulemaking will help with is putting all those disclosures in a consistent, comparable format that would allow us to more easily further our investigations,” SEC Enforcement Division Director Gurbir Grewal told lawmakers in July.
Shoehorning Cases
Sanjay Wadhwa, the task force head, has long been known as an extremely aggressive SEC lawyer, said David Kornblau, a Dentons partner and former SEC lawyer.
Wadhwa, who also is the SEC Enforcement Division’s deputy director, has racked up a lengthy list of victories in cases over insider trading and other corporate wrongdoing since he joined the agency in 2003.
The SEC lawyer has a “tenacious approach” to enforcement, Grewal said when Wadhwa was promoted to deputy director last year.
Wadhwa now is tasked with rooting out wrongdoing in a space without tailored rules and a clear target. The SEC’s 2021 risk alert to fund managers said it defined ESG “in the broadest sense to encompass terms such as ‘socially responsible investing,’ ‘sustainable,’ ‘green,’ ‘ethical,’ ‘impact,’ or ‘good governance.’”
“They will be on the lookout for cases that can be shoehorned into an ESG theme,” Kornblau said.
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