I would like to separate the facts from the fiction on ESG.
What is ESG?
ESG is short for environmental, social and governance.
Essentially, ESG is an attempt by the left to impose their racial, gender, economic and climate woke agenda on corporations, funds, individuals and America to maintain their power and make themselves rich.
ESG has impacted individuals by its application to retirement fund managers.
The Department of Labor (DOL), weaponized under the Biden administration, has adopted rules, effective Jan. 30, 2023, amending the Employee Retirement Income Security Act of 1974.
These rules tell retirement fund managers that they may, and infer should, consider ESG factors when investing employees’ money.
The DOL attempts to address the fiduciary duty to maximize the financial interest issue by giving consideration to ESG’s supposed economic impact and incorporating it into the risk-benefit analysis.
I believe that viewing ESG, in most cases, as part of the economic review is a strained analysis and may not shield fund managers from violating their fiduciary duties to maximize financial interests, a position supported by statute and judicial review.
Most individual investors want the maximum return on their investments and do not want to compromise their investments for the sake of ESG causes.
The weaponized Securities and Exchange Commission (SEC) has proposed ESG regulations with respect to public companies.
On March 24, 2022, the SEC, in a three to one vote, proposed rules (with projected final approval in April 2023) mandating climate-related disclosures in companies’ annual reports and registration statements, which goes from the existing principle-based approach left to the issuer based on materiality, to a more prescriptive approach requiring disclosure regardless of materiality and, in some cases, reliance on gathering information from third parties.
These proposed rules require estimates, assumptions, conjecture and speculation, especially with respect to the reporting of Scope 3 Emissions which — according to the Environmental Protection Agency — are those emissions that are "the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain," a rule that I believe will lead to increased expense and litigation.
These proposals are set on an industry where there are a limited number of ESG evaluation providers, each using different methods with no standardization for the data relied upon.
The cost to meet the SEC proposed rules on climate alone are huge.
It's estimated that a large-cap company would require at least $10 million to establish a program to comply with the SEC proposed rules for climate alone and that much of this cost would be recurring.
Costs of this nature in dollars, personnel and time are significant for a large-cap company.
They are even more burdensome for a mid-cap or small-cap company.
Outside of the climate area, companies are increasingly being pushed into doing costly workplace culture, supply chain and other audits examining practices, procedures and policies with respect to ESG.
These resources could be better utilized to improve company performance.
Interestingly, the Department of Defense, NASA, and the General Services Administration are each getting into the ESG act by proposing rules that would require federal contractors to disclose and reduce their greenhouse gas emissions as well as disclose their climate-related financial risks.
These proposed rules extend to private companies in the supply chain, but interestingly exempt institutions of higher education, nonprofit research entities, and state and local governments.
I am not surprised that institutions of higher learning and nonprofit research entities are exempt as they are bastions of learning and indoctrination of the left, receiving vast sums of money from governments and the left.
Ultimately, based on the U.S. Supreme Court decision in June 2022 in West Virginia v. Environmental Protection Agency (2022 WL 2347278, 2022 U.S. LEXIS 3268), the DOL rules are being challenged in the courts, and it appears that these agencies, the SEC and others, may have exceeded the authority granted to them by Congress as well as possibly intruded on certain state corporate laws and, in the case of the SEC, be in contravention of its own cost-benefit analysis requirement.
The result of ESG is increased costs, a decrease in profits, a waste of resources including increased employee allocation and the hiring of outside experts, a waste of time, waste in the form of deviation of attention from important matters (such as performance), and increased potential for meritless litigation, all for minimal, if any, benefit and possible detriment to corporations, funds, and individuals.
ESG is nothing more than an attempt by the left to impose their racial, gender, economic and climate woke agenda on corporations, funds, individuals and America to maintain their power and make themselves rich.
In summation, we must consider the facts and not be fooled by the fiction.
(Author’s note: As of this writing, the U.S. House passed a bill and the U.S. Senate passed a bill — which President Biden has indicated he will veto — in opposition to the Department of Labor rules discussed in the preceding article.)
Perry Kalajian is an attorney, consultant, and analyst with extensive experience in the areas of banking, finance, and restructuring. He possesses multiple degrees in each of the areas of business and law. Mr. Kalajian has had numerous appearances on Newsmax TV.