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What about market efficiency?

As many of us now know, the US securities regulator took a major step in March when it enacted for the first time, rules requiring standardized financially material climate disclosures. According to the SEC’s head, Gary Gensler, “These final rules…will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”


It should be said that the final rule is a weaker version of what was proposed in 2022. At that time, the SEC would have required companies to disclose Scope 3 emissions (those indirect emissions related to such things as purchased goods and services and the end use of goods sold by the company). The final rule also narrows Scope 1 and Scope 2 disclosures to emissions deemed “material” for larger SEC-registered companies.


If one thought that this accommodation would be lauded by companies and other stakeholders strongly opposed to anything ‘ESG’, one would be wrong. In fact, before the ink was dry on Gary’s signature, the lawsuits dropped.


A coalition of Republican-led states (West Virginia, Texas, Utah, and others) argue that the rule exceeds the SEC's regulatory authority and is an example of a federal agency addressing a "major question" without explicit Congressional authorization. It should also be noted that many of these states had already passed bans on their state pensions considering any ESG factor in investing. Patrick Morrisey, West Virginia’s attorney-general, went so far as to say that it may also violate the first amendment by forcing businesses “to put forth initiatives and disclose information that they might not otherwise want to do”. Well, what a standard that would be. Disclose only what you’re comfortable disclosing!


The powerful U.S. chamber of commerce launched its own lawsuit, arguing that the new SEC rule violates constitutional rights by compelling companies to engage in non-factual, costly speech on climate change.


In light of all of this, the SEC has put on hold the rule while a US appellate court weighs the legal challenges. The SEC stressed that the move did not mean it was “departing from its view”.


We observe this with some amount of frustration and consternation. As asset managers, we want more information. We want more data. Currently, companies’ climate disclosures are not sufficiently complete, consistent or comparable and are reported on a mostly voluntary basis. We expect in the next few years to be able to have externally audited and standardized environmental data and related disclosures in audited financial statements, with workforce data not far behind. We anticipate this climate rule, which will survive litigation, to be the first major step in this likely decade long process.


What is most discouraging is how climate reporting of financial material information (it says so right in the rule) has become so political. Somehow, assessing how climate emissions might affect profitability and share-price has become “woke” or somehow aligned with liberal values when they are in fact fundamental to a company’s operations. As we wrote in our June 2023 newsletter (Is ESG Political) what makes things disheartening is that the ‘anti-woke’ Republican candidates aren’t speaking about ESG from a place of personal conviction, but instead have learned from focus groups and high paid consultants that ESG is a blanket term for issues that can rile up the Republican base.


There should be nothing more mainstream than accurate and timely information to inform investment decision making. Didn’t Milton Friedman and every other efficient market thinker talk about the importance of freely available information to enable buyers and sellers to make informed decisions and enable the efficient allocation of resources?


But no! Only barriers. Sadly, anything ESG is now tainted with the same dirty brush for those who believe the propaganda.


We do believe rational minds will prevail, if not today, then tomorrow. In the meantime, we are able to say that at Honeytree, 65% of our Global Equity Strategy is comprised of companies that are not only reporting Scope 1 and 2 emissions – they have approved science-based targets validated by SBTi.  Many of our companies also have externally assured emissions data.


We will wait and see if the SEC can get its rule through before the next presidential election. Of course, if there was a change in administration… well, we won’t go there… for now!


Cars going both directions on a highway in heavy traffic

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