If there’s one thing that most people in our community can agree on, it’s that the proliferation of “ESG” ratings and funds is causing frustration and confusion. However:
ESG scores can play a key role in determining whether fund managers or exchange-traded funds buy a stock, how much companies pay on loans, and even if a supplier bids for a contract. They can also help verify whether a bond is really “green” or if a company is eligible for a stock benchmark. Investments in about $30 trillion in assets have relied in some way on ESG ratings.
That’s according to a recent Bloomberg article, which cites an MIT working paper. But ratings are difficult to compare and can vary widely. And the variation in how they’re employed – by “ESG” funds, in particular – only compounds the problem. Maybe that’s why the SEC is reportedly looking into these investors:
The SEC initiative is based out of the agency’s Los Angeles office, according to a person familiar with the matter. It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.
One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for a list of the stocks it had recommended to clients, its models for judging which companies are environmentally or socially responsible, and its best- and worst-performing ESG investments, according to a copy of the letter viewed by The Wall Street Journal. It follows a similar examination letter sent last year to other asset managers, suggesting the regulator decided to broaden its examination.
It’s not clear what the end game would be for this type of examination. Increased disclosure? A standardized reporting framework? That’s a concept I’ve blogged about for companies. The EU already requires large companies to report on their sustainability policies – and within the next couple years will also encourage indexes and benchmark providers to disclose their ESG methodologies.
-Liz Dunshee, TheCorporateCounsel.net December 23, 2019
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