ESG Investment Landscape: the US

The article highlights the SEC's proposed regulations and enforcement actions, the DOL's rule discussion, and the contribution of the CFA Institute to ESG practices' advancement. It also examines state legislators' measures in favor of and against ESG integration, citing ideological and protectionist motives.

Proposed SEC Rules:

The SEC has been leading in developing ESG-related regulations, audits, and enforcement. The proposed rules are intended to improve investor disclosures on climate change and encourage openness regarding ESG investment practices. The SEC is moving in the correct path by emphasising risk management and adding more futuristic metrics. To avoid confusion and guarantee the proposed regulations are applied consistently, definitions and terminology must be clarified.

SEC Enforcement Actions:

The SEC's recent enforcement actions against Goldman Sachs Asset Management, Wahed Invest LLC, and BNY Mellon Investment Adviser have highlighted the significance of honest and transparent portrayal of (ESG-related) investment practices. Violations of the law highlight the need for strong laws and procedures governing ESG investment processes. The SEC's actions emphasise the importance of upholding honesty and trust in the ESG investment ecosystem.

  • Goldman Sachs AM: The case against Goldman Sachs Asset Management involved allegations that it made misleading statements about its process for selecting investments for its ESG funds. The SEC found that the company's claims that its investment process was guided by a rigorous methodology for assessing the carbon footprint of its investments were misleading, as the process was not actually applied consistently across all investments. The SEC also found that the company failed to adequately disclose that its ESG funds included investments in fossil fuel companies, which were inconsistent with the funds' stated investment objectives. As a result of the settlement, Goldman Sachs Asset Management agreed to pay a $1 million penalty and to enhance its policies and procedures for selecting investments for its ESG funds.
  • BNY Mellon IA: BNY Mellon Investment Adviser was charged by the SEC in October 2021 for allegedly making false and misleading statements related to its ESG investment process, including the use of data and analytics. The SEC found that the firm failed to disclose that it did not use the promised ESG analytics tools and instead relied on third-party ratings.
  • Wahed Invest LLC: In the case of Wahed Invest LLC, the SEC charged the firm in November 2021 for allegedly making false and misleading statements related to its sharia-compliant investments. The SEC found that the firm did not have any formal policies or procedures in place to ensure that its investments were sharia-compliant, and that the firm misled investors by making claims of a rigorous sharia compliance review process.

The DOL Rule Debate

The DOL regulation "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" has been a hot topic of discussion and legal challenges. The regulation requires that ERISA fiduciaries put the beneficiaries' best interests first and consider only pecuniary factors when making investment decisions. While some differences involve fiduciary obligations and possibly conflicting interests, the Biden administration's rule mostly conforms to earlier standards.

However, the controversy over the DOL regulation highlights the challenge of balancing narrow financial interests with more comprehensive ESG factors. Some stakeholders argue that ESG considerations are critical for long-term investment performance and that ignoring them is inconsistent with fiduciary duties. Others are concerned that incorporating ESG factors into investment decision-making may lead to a lack of transparency and result in investment decisions based on non-pecuniary factors.

Furthermore, there are concerns that using ESG investments to obtain collateral benefits may not be in line with ERISA fiduciary obligations. While ESG investing may align with beneficiaries' values and promote broader social goals, the DOL has clarified that fiduciaries must evaluate investments based on their financial merits alone.

In summary, the controversy over the DOL regulation highlights the complexities of incorporating ESG factors into investment decision-making and the challenge of balancing competing interests and priorities. While the Biden administration's rule largely conforms to earlier standards, the debate over the regulation underscores the need for clear guidance and standards for fiduciaries to ensure that they act in the best interests of beneficiaries while also considering the broader impact of their investment decisions.

State Legislators

In recent years, some Republican "red" states in the US have introduced legislation aimed at restricting the consideration of ESG factors in investment decision-making or boycotting certain businesses due to their perceived ESG stance. For example, in 2017, Texas passed legislation prohibiting state pension funds from investing in companies that boycott Israel, which some viewed as a restriction on free speech and the ability to consider ESG factors. In 2021, several Republican-controlled states, including Florida and Georgia, introduced bills that would prohibit public pension funds from investing in companies that boycott fossil fuels or Israel.

Hereafter some example extract from state policies:

Arkansas H.B 1049: A financial institution shall not utilize standards or guidelines based on nonfinancial, nontraditional, and subjective measures, including without limitation environmental, social and governance criteria; diversity; equity; and inclusive policies; or political and ideological factors.

Texas H.B. 982: A governmental entity may not enter into a contract with a company for goods or services unless the contract contains a written verification from the company that it does not and will not during the term of the contract, use prohibited ESG criteria to evaluate a business decision or investment strategy. “Prohibited ESG criteria” means environmental, social, and governance criteria that further political policies at the expenses of the Texas economy and company shareholders.

Kentucky S.B. 205: If, after the time provided by paragraph (b) of this subsection expires, the financial company continues to engage in energy company boycotts, the state governmental entity shall sell, redeem, divest or withdraw all publicly traded securities of the financial company, except securities describes in subsection (5) of this section, according to schedule provided in subsection (4) of this section.

Some of these bills are seen as motivated by ideological or protectionist goals rather than legitimate fiduciary obligations. Critics argue that such legislation could limit investment options for pension funds and harm returns, as well as stifle the advancement of sustainable and responsible investing. The controversy over these bills highlights the tension between narrow financial interests and broader ESG concerns in investment decision-making.

CFA Institute: Advancing ESG Practices

The CFA Institute is essential in advancing international investment standards, such as ESG integration. Investment professionals are given the knowledge and ability to incorporate ESG issues into their decision-making processes. The CFA Institute has contributed to projects promoting transition finance research and international ESG disclosure requirements. These initiatives are essential for ensuring that ESG practices are meaningful and consistent across the sector.

Services of the CFA Institute include:

  • Certificate in ESG Investing
  • Global ESG Disclosure Standards for Investment Products
  • Greenwashing Research
  • Transition Finance Research
  • Clarification and Harmonization of Certain ESG Terminology

In conclusion, ESG integration continues to influence the American investing landscape. Although there has been progress with new SEC rules and initiatives from groups like the CFA Institute, there has also been opposition from some state lawmakers and ongoing discussions about the DOL rule. Collaboration, language clarity, a dedication to transparency, and fiduciary responsibility are necessary to achieve a balanced approach considering financial and ESG factors. By overcoming these obstacles, the USA can pioneer a sustainable and responsible investment landscape that benefits investors, society, and the environment.

The role of Brainie

Brainie was founded to help CFA ESG candidates pass their ESG certificate. With our question bank or Q-bank, we have created a tool to help candidates practice before the exam. As a CFA Institute preparation provider, our questions are based on the official CFA Institute syllabus and are always updated to the latest version. In addition, we provide summary notes and mock exams to complement the learning experience and increase the chances of success. But our mission does not end there. We aim to guide the responsible investing journey by providing first-hand insights, highlighting trends and recent developments, and expanding our platform to include future learning and developments (such as the Climate Certificate).

Stay tuned