Saturday, December 21, 2019

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Wall Street's growing foray into impact investing has regulators questioning investors’ ESG criteria

By Juliet Chung and Dave Michaels of The WSJ.

I have done a number of posts on "socially responsible corporations." Will they make more money by "doing good" instead of just trying to maximize profits? Those are listed at the end.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. He even wrote:
"I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
Now excerpts from the article:

"Many investment firms have been touting new products as socially responsible. Now, regulators are scrutinizing some funds in an attempt to determine whether those claims are at odds with reality.

The Securities and Exchange Commission has sent examination letters to firms as record amounts of money flow into ESG funds. These funds broadly market themselves as trying to invest in companies that pursue strategies to address environmental, social or governance challenges, such as climate change and corporate diversity.

But there have been critics of the growth in these funds. Some argue investment funds should focus solely on returns, and some firms have faced questions about how strictly they adhere to ESG principles."

"It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.

One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for a list of the stocks it had recommended to clients, its models for judging which companies are environmentally or socially responsible, and its best- and worst-performing ESG investments, according to a copy of the letter viewed by The Wall Street Journal."

"“Now the SEC is saying, ‘Wait, how do you know these are ESG products and that you don’t have a fossil fuel company with known, poor ESG performance in there?’ ”" (said Betty Moy Huber, co-head of law firm Davis Polk & Wardwell LLP’s environmental, social and corporate governance group)

"Examiners can issue deficiency letters based on their findings that tell companies they are out of step with rules. While the letters don’t trigger fines, examiners can refer their findings to SEC enforcement attorneys for a formal investigation.

The regulator in the letter asked whether the adviser followed well-known policies for socially responsible investing, including the United Nations’ Principles for Responsible Investment.

Investment firms including BlackRock Inc. and Fidelity Investments have signed onto the U.N. framework, according to the PRI, which administers the effort in partnership with the United Nations."

"The letter asked for proxy voting records and documents that related to how the adviser decided to vote on an ESG issue.

Investors’ focus on the environmental and social impact of companies has grown in recent years as issues like climate change and gender equality have become more mainstream. Mounting data suggest paying attention to such factors can boost returns, say investors.

Other topics frequently grouped under the ESG umbrella include companies’ use of natural resources and how they treat workers"

"Senior SEC officials have sometimes expressed concern that focusing too narrowly on corporate morality could undermine a money manager’s duty to act in the best interest of clients."

"Ms. Peirce has criticized ESG for having no enforceable or common meaning."

"many ESG factors rely on research that is far from settled,” she said"

"trying to figure out to what extent ESG might stand for ‘enabling stakeholder graft.’”

Flows into funds focused on socially responsible investing have soared from $2.83 billion in 2015 to $17.67 billion this year"

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ


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