Republican SEC commissioner warns standards could empower ESG raters

Mark Uyeda raised ‘significant concerns’ about ESG rating standards in speech on lack of definition in sustainable finance.

Republican Securities and Exchange Commission commissioner Mark Uyeda has raised “significant concerns” about establishing ESG rating standards, warning that it could force companies to “further the agenda of the ESG rating firm in order to obtain capital”.

Uyeda, who was sworn into office at the US financial watchdog in June by President Biden, was speaking in a personal capacity at a gathering on Friday of the California ‘40 Acts Group, a US nonprofit focused on the investment management sector.

In a speech titled ESG: Everything Everywhere All at Once, he highlighted the recent call from the International Organization of Securities Commissions (IOSCO) for voluntary standard-setting bodies and industry associations “to promote good practices among their members to counter the risk of greenwashing related to asset managers and ESG rating and data providers”.

Uyeda raised concerns that the establishment of ESG standards could result in specific rating firms having too much power over companies, particularly if asset managers push firms to satisfy their rating criteria.

“Rather, these standards may be intended as a means for asset managers to engage with company management in a broader effort to drive companies to satisfy the criteria of a specific ESG rating service,” he warned.

Uyeda continued: “Because ESG ratings may be divorced from matters of financial materiality, they can reflect a particular political or social agenda… The result – and perhaps the point – is that companies will be forced to further the agenda of the ESG rating firm in order to obtain capital.”

Such a system, Uyeda concluded, “has more in common with a George Orwell novel than what anyone would consider an accepted financial analysis tool”.

Uyeda has served at the SEC since 2006, including as senior adviser to former chair Jay Clayton, who was appointed to the role in 2017 by former President Trump. Under Clayton, investors found it increasingly difficult to push firms on ESG issues.

The central thesis of Uyeda’s speech was an alleged lack of definition as to what ESG is, given “the inability to objectively define ‘ESG’ or any of its components”.

Another complicating factor when it comes to ESG was a “temptation” for regulators to place their “fingers on the scale in favour of specific ESG goals or objectives”, he said.

Uyeda also took aim at ESG rules currently being prepared by the SEC, including the climate disclosure rule for US listed companies, which is expected in April.

Whether such “unique, highly prescriptive disclosure requirements” are necessary, he claimed that current rules “provide the Commission with sufficient authority to bring enforcement actions against advisers and funds that engage in ‘greenwashing’”.

In a similar vein, Uyeda argued that the recent rule change by the US Department of Labor, which allows workplace pension schemes to consider ESG factors when selecting investments, including for default funds, has also only added to the confusion around ESG.

A change to the “Prudence and loyalty in selecting plan investments and exercising shareholder rights” rule in November undid the changes made under Trump, which made it harder for scheme fiduciaries to consider ESG factors.

But Uyeda argued that the new “permissive language… seems merely to create confusion as to why ESG factors – and not any other type of investment factor – are singled out as being permissible for consideration”.

He added that if read in a vacuum, the new rule represents “an endorsement and re-affirmation of the Trump administration’s position”. If read alongside “contemporaneous statements of DoL leadership”, however, it represents a significant change that permits a greater degree of consideration of ESG factors. “Which is it?” asked Uyeda.