By Zach Brown
The secret to any great magician is mastering the art of misdirection— pulling your attention one way while performing the trick unseen. But the same skills that make a great magician make a great pickpocket. As we remain preoccupied with the daily assault to the senses of the administration, significant blocks to progress are conducted largely out of view and public discourse.
We can see this trend when analyzing two recent actions of the Securities Exchange Commission (SEC) and the Department of Labor (DOL).
Recently, the Securities Exchange Commission adopted new rule amendments addressing the proxy advisor industry that will only make it more difficult for investors to receive timely and impartial advice. As a quick refresher, “proxy advisory firms” are organizations utilized by investors and shareholders to receive useful information and guidance on shareholder voting issues. These “shareholder voting issues” can range all the way from topics regarding executive compensation and corporate structure to focuses on climate and social causes. The fervent demands for proxy advisors’ investigative research into environmental, social, and governance (ESG) matters highlight a long overdue desire by shareholders to take an active role in the corporate reform process.
Under the SEC’s new proposed rules, proxy advisory firms are now required to provide their research and conclusions to companies at the same time as their investor clients, while also providing their investor clients with any responses or rebuttals on the part of the company. These rules are a clear infringement of shareholder rights —effectively transforming what is supposed to be an independent and private process between proxy advisors and their clients into a relatively toothless exercise in corporate accountability.
Likewise, the Department of Labor has also engaged in toxic rulemaking to halt the recent uptick of ESG investing. On June 23, the Department of Labor proposed a rule that directly harms the ability of private-sector ERISA retirement plan fiduciaries to select investments based on ESG considerations. Under the proposed rule, a fiduciary is only allowed to conduct investment actions based solely on the outlook of profit.
Why are they doing this? The Department of Labor is pushing a stone aged understanding of the economic market that concludes that ESG investing doesn’t produce substantial economic returns. Of course, this couldn’t be farther from the truth, as ESG funds largely outperformed conventional funds last year. And even in the throes of COVID-19, ESG assets are thriving.
Adding insult to corporate pressure induced injury, the rulemaking process has been dubious as well. For one, the comment period was relatively short for such a large change (a 30-day comment period during a national health crisis, really?) Secondly, even given that short comment period, the public response generated was overwhelmingly negative, as members of the public and advocacy organizations consistently criticized the proposal up and down for an extensive host of issues. And last, but certainly not least, the DOL’s cost benefit analysis used to justify their actions could be described as highly questionable at best and grossly inadequate at worst.
Viewing these proposed DOL rule changes in concert with the SEC actions finalized last month makes matters abundantly clear: there’s a regulatory war being waged to curb ESG investing and it’s time to fight back. Given the SEC’s recent attempts to curb investor access to ESG information (along with some problematic public comment period issues of their own) the Department of Labor owes it to Americans to reverse the rulemaking process, extend the public comment period, and make an equitable decision.
In 2020, socially responsible investments are financially wise investments— it’s time for our administrative agencies to read the room.