SEC Commissioner Uyeda Raises Concern on Use of ESG Ratings

SEC Commissioner Mark T. Uyeda argued that increasing Japan's household participation in the stock market requires assurance that a company's board and management are acting in a fiduciary manner to shareholders. He emphasized that companies must act to maximize shareholder value and not place the interests of investors subservient to private ESG interests.

In remarks before a Harvard Law School Program on International Financial Systems in Japan, Mr. Uyeda raised concern over the use of ESG ratings including that (i) there are different approaches to analyzing and weighting ESG factors; (ii) ESG ratings can often reflect the particular social policy views of the ESG ratings provider and (iii) "without tying such factors to financial return . . . who are the intended beneficiaries of these ratings — the investors in the company or other third-parties that do not have anything at stake?"

He said that companies may use Japan's Financial Services Agency code of conduct for ESG evaluation and data providers to understand how investors use ESG evaluations in their investment decisions and to "purportedly . . . 'gain a concrete understanding' of the business benefits that would result from improved ESG ratings." However, Mr. Uyeda warned that, to the extent a company puts ESG interests ahead of investors' interests, investor confidences could diminish. He stated that "[i]f investors cannot expect that a company will seek to maximize its value, then they may choose to not invest at all."