February 9, 2022

Can’t Please Everyone: Conflicting “ESG” Claims Draw SEC Enforcement Scrutiny

Recently, Reuters reported that the SEC’s Dallas-Fort Worth office is investigating claims made by some companies who are walking a line between shareholder ESG demands and state regulatory restrictions. This Mintz blog explains:

Specifically, the SEC is “scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies.” This investigation appears to stem from a recent Texas law that prohibits companies doing business with Texas state governmental entities from discriminating against firearms or fossil fuel companies. The SEC appears to be concerned about how companies may have acted in ways inconsistent with their ESG disclosures when complying with that Texas state law.

Although this enforcement activity is perhaps not the precise type that was anticipated when the SEC announced a focus on ESG issues — as both companies and the private bar thought that SEC enforcement actions would be directed against failures to comply with ESG disclosure standards articulated by the SEC — this type of enforcement activity, centering on potential inconsistencies between information disclosed to different types of recipients, is squarely within the SEC’s remit.

This clash has been many months in the making. Lynn blogged about a year ago that energy-producing states were preparing legislation to push back on banks’ net-zero commitments. Last fall, Bloomberg reported that some banks were withdrawing from doing business in Texas, after new laws there went into effect that barred state & local governments from working with banks that have taken a stance against the firearms and fossil fuels industries.

The Leiutenant Governor of the Lone Star State also urged the state comptroller to cut off BlackRock following Larry Fink’s 2022 letter to CEOs – even though the asset manager is pushing for a gradual transition versus boycotting or divesting from oil & gas companies. Similarly, the West Virginia State Treasurer recently announced that the state will no longer use BlackRock in its banking transactions, because of its stance on fossil fuels and its investments in Chinese companies.

It’s easy to think of robust ESG commitments as “good” and lagging advancement as “bad.” These conflicts are a reminder that it’s not always that simple. There will be trade-offs – even if investors & companies follow the “orderly transition” that BlackRock outlined in a 16-page report last week. An important part of making ESG commitments will be balancing environmental advancements with social impacts (and vice versa). That is part of why board oversight of E&S strategy is so important.

Liz Dunshee