Warnings against ESG reform in US
Pushback is mounting in the United States against efforts to overhaul environmental, social and governance (ESG) reporting requirements.
This week, the world’s largest asset management firm BlackRock Inc warned the national market regulator that companies would struggle to attract investment under stricter rules.
What is going on?
ESG investment continues to grow as stakeholders focus more on goals like sustainability. But with increasing value comes the threat that investors will cash in on the trend without following through on the promises.
At the moment, the US Securities and Exchange Commission (SEC) is nervous that some investment funds that boast strong ESG goals are merely engaged in “greenwashing”, in other words, claiming to have green policies which don’t exist in practice.
Because of this, the SEC is ramping up reporting requirements, forcing funds to disclose more about their ESG impacts, so stakeholders have clarity on whether an activity is greenwashing or not.
The SEC continues to champion this policy, praising its ability to “promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of ESG factors.”
What has BlackRock said?
BlackRock thinks the SEC’s new tack goes too far and will only serve to disorient investors.
“The proposed requirements would increase the potential for greenwashing and lead to investor confusion,” the firm warned in a recent letter to the SEC.
“The granular nature of requirements will inevitably lead to the disclosure of proprietary information about these strategies, reducing the competitive advantage of those unique insights.”
Deflating the market
Essentially, BlackRock is worried that the new measures won’t have the intended effect and, at the same time, deflate enthusiasm in the marketplace.
Investors will be overwhelmed by the sudden increase in disclosure requirements, they say, and will think of ESG as more important than it is.
BlackRock is in a tricky situation because while it represents the interests of investment funds, it knows how much ESG is growing in importance and wants to place itself on the popular side of that argument.
It has previously acknowledged that more oversight is essential for proper ESG disclosure, so the firm is by no means against combatting greenwashing.
But the firm is nervous about the threat to “business as usual”. Activists and government officials are calling for far more transparency, but BlackRock has a problem if it changes worldwide investing norms.
This will likely remain the viewpoint: by all means, change rules to combat greenwashing but don’t disrupt the investment landscape in the process.
The SEC will likely move forward with rule changes despite protests from firms like BlackRock, despite its size and influence.
Whether investors become as confused as the firm says is what to watch in the coming years. Will they react as predicted? Or will they simply get used to the new norm of ESG disclosure?