In mid-August, Attorneys General (AGs) from 21 states sent a comment letter to the Securities and Exchange Commission (SEC) to voice their concern that the SEC is continuing their attempt of overreach with additional encouragement of environment, social, and governance (ESG) investing. The AGs compare the situation to the recent West Virginia v. Environmental Protection Agency (EPA) decision where the Supreme Court ruled the EPA’s Clean Power Plan overstepped its legal authority, despite the environmental link. Attempting to regulate emissions is certainly not within the SEC’s scope, and is thus another, egregious example of Mission Creep.

The SEC is attempting to require enhanced disclosures by investment companies about environmental, social, and governance investment practices. They claim their guidance will better inform investors. ESG investments that consider environmental factors would have to disclose the greenhouse gas emissions of a portfolio: “First, the fund must disclose the ‘carbon footprint’ of its portfolio… Second, the fund must disclose the ‘weighted average carbon intensity’ of the fund’s portfolio.” The state AGs believe these ESG guidelines for investing are simply not within the scope of the SEC’s authority – their letter stated:

“First, the Commission does not have the statutory authority to issue it. Second, the Proposed Rule would violate the First Amendment’s free-speech guarantees. Third, the Proposed Rule does not reflect reasoned decision making and would fail arbitrary-and-capricious review…the SEC never explains why information on ESG-focused investment strategies is uniquely helpful to investors, while information on other investment strategies is not. In short, the Proposed Rule provides no evidence that it is ‘certain and clear’ that any of the ESG factors will affect a fund’s or its portfolio companies’ ‘fortune[s].’”

This new rule comes after many have already voiced concerns about the SEC’s proposed climate disclosure rule, which would include reporting on indirect greenhouse gas emissions (GHG), a task which is immensely expensive, difficult, and time consuming. The attorneys general are also concerned that the SEC is no longer focusing on protecting investors from fraud – their letter also stated, “Now, it has assumed the responsibility of fighting climate change and other social ills. It wishes to use mandatory disclosure to pressure companies and investors to change their behavior.” The SEC has yet again gone outside of its lane with the issuing of this new proposed rule on ESG investing.

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