October 26, 2022

SEC Commissioner Uyeda Criticizes Agency's ESG Rule Proposals and Process

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Mark T. Uyeda criticized the SEC's proposal to incorporate ESG factors into rulemaking, describing the proposals as "staggering in their complexity and reach."

Mr. Uyeda asserted that ESG is, for practical purposes, an undefined term comprising different subunits that cannot be meaningfully aggregated. In light of this ambiguity, Mr. Uyeda argued that any information production by issuers would be meaningless. As an example of the unworkability of any ESG standard, he argued that there is no objective way to aggregate the ESG bona fides of a company that produces green technology but may also be abusive to its employees. Mr. Uyeda warned that because ESG is an amalgam of what may be considered politically attractive or desirable, its definition will fluctuate with the politics of the day.

Mr. Uyeda also questioned whether ESG disclosures were "material" as the concept is used in securities laws, where the emphasis is on financial materiality.

Mr. Uyeda attributed the large volume of comments in response to the SEC's ESG-related proposals to the overall vagueness and significant complexity of such proposals.

Mr. Uyeda raised concerns with the speed and complexity of the entirety of the SEC regulatory agenda, stating that at this time "we should not overwhelm firms with significant and costly new regulations."

Commentary

Mr. Uyeda's strong criticism of the SEC's rule proposals as to ESG follows on the heels of his severe commentary on the SEC rulemaking process.

At this point, the SEC is struggling with deep divisions that impact its standing. It is not just the lack of consensus as to the substance of the SEC's rule proposals. What puts even more strain on the SEC's reputation is that the two minority party commissioners have both suggested the agency's rulemaking process is fatally flawed in that it doesn't properly allow for public comment (e.g., by allowing very short comment periods that overlapped with major holidays). This criticism cannot be dismissed as sour grapes from the minority, given that a bipartisan coalition of Congress members wrote to SEC Chair Gary Gensler urging him to improve the rulemaking process.

What will become of Chair Gensler's agenda is uncertain. While one would expect that he has the votes to win 3-2 on almost any proposal, a number of the final rulemakings appear vulnerable to legal challenge, whether because they violate the Administrative Procedure Act or because they exceed the SEC's authority under the relevant statutes.

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