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The comments on the SEC’s pair of proposals for ESG investment funds are showing that these rules could increase pressure for portfolio companies, which is something that Lawrence said to watch for when he blogged about the proposals earlier this year. Here’s an excerpt from BlackRock’s recent comment letter to the SEC on the proposal to enhance disclosure about investment companies & advisers’ ESG practices:

Final rules on corporate GHG disclosures should be implemented before requiring fund level disclosures. Climate risk is financial risk and as a fiduciary to our clients, we have taken a number of steps to address climate-related financial risk, including by providing greater transparency. However, climate metrics continue facing methodological and data challenges. Corporate level disclosure requirements should precede requirements for fund level disclosures to provide market participants with climate-related information, including greenhouse gas (“GHG”) metrics.

We also respectfully disagree with the SEC’s proposal for funds to resort to “best efforts” when disclosure of GHG emissions is not available. Locating and estimating information that is not required to be publicly available is an undue burden and likely to lead to disclosure across funds that is not comparable or consistent across funds, negating the purpose of the SEC’s proposed amendments.

Moreover, in the absence of mandatory GHG emissions reporting across the public and private markets, the proposed rule would force funds to step into what we believe is an inappropriate role of policing their portfolio investments through negotiating for and monitoring data needed for their own disclosures. Further, as we noted in our response to The Enhancement and Standardization of Climate-Related Disclosures for Investors, we respectfully request that the SEC consider its approach with respect to Scope 3 emissions which is distinct from Scope 1 and 2, given the higher degree of estimation and methodological complexity in the former.

The proposals for investment advisers also contemplate requiring more disclosure about ESG voting & engagement strategies. Here’s an excerpt from the SEC release:

We also are proposing amendments to fund annual reports to require a fund for which proxy voting or other engagement with issuers is a significant means of implementing its strategy to disclose information regarding how it voted proxies relating to portfolio securities on particular ESG-related voting matters and information regarding its ESG engagement meetings

BlackRock has recommendations for that part of the proposal as well:

Recognize that engagement and proxy voting are standard parts of asset management. Engagement and proxy voting are a standard part of asset management, for both active and index products, and are not definitive characteristics of an ESG-Focused Fund, or even definitive characteristics of ESG integration. Engagement is a mechanism for investors to seek clarity and provide feedback to companies on governance topics; particularly for index funds, it is not done to exert power over a company’s management team’s decision-making or engineer specific outcomes.

It is crucial to note that stewardship engagement and proxy voting are at their core about encouraging transparency and enabling investment managers to hold company leadership to account where board directors or executive management seem not to have acted in long-term shareholders’ interests. As the bedrock of engagement is governance, which is the “G” of “ESG”, all engagement has an ESG component and indeed nearly 90% of our engagements in 2021 covered a governance topic.

When “E and “S” topics are raised in engagement meetings, the intent is to seek greater transparency for our investors on those issues to make informed investment decisions not to dictate a specific outcome to company management. Additionally, the detailed nature of the disclosure required on both engagement and proxy voting is unnecessary, potentially misleading and, particularly in relation to voting, duplicative of already existing disclosure in Form N-PX and the fund’s annual shareholder report.

BlackRock’s comment letter also warns that parts of the SEC’s proposal could actually worsen “greenwashing” and investor confusion. Like many of the SEC’s recent “ESG”-related rulemaking initiatives, the two proposals aimed at investment companies & investment advisers are drawing a lot of suggestions for improvement.

– Liz Dunshee