SEC Commissioner Warns against Standardized ESG Ratings

SEC Commissioner Mark T. Uyeda raised "significant concerns" over the establishment of ESG ratings standards, warning that such standards could give ratings firms too much influence over companies and asset managers who market themselves as ESG compliant.

In remarks at an investment management forum, Mr. Uyeda explained that ESG products typically charge higher fees than non-ESG equivalents, which he said may motivate advisers to create or market products as being "ESG" for financial reasons. He expressed concern that some advisers recommending ESG products may be disregarding their fiduciary duty to clients by pursuing goals outside of economic considerations. He urged the SEC and other regulators to avoid tipping the scale in favor of any particular political or social cause, and to continue adhering to the established framework of financial materiality.

Mr. Uyeda cautioned that conforming ESG standards to be compliant with federal securities laws may be difficult given the numerous interpretations of what constitutes being an ESG investment. Mr. Uyeda highlighted a study showing this discrepancy, saying that "the two largest credit rating agencies issue the same letter category rating [credit] 78% of the time . . . [while] the same study showed that two large ESG rating firms agreed on their ESG ratings only 18% of the time." He attributed this discrepancy to a lack of agreement as to (i) "what the relevant categories of ESG performance are," (ii) "how important the categories are relative to one another" and (iii) "how well a company performs with a given category."

Beyond concerns raised on the SEC's proposed ESG requirement, Mr. Uyeda criticized the DOL's rule on ERISA fiduciary standards regarding employee-sponsored benefit plans which, he said has created confusion among advisers. He criticized a DOL statement suggesting that advisers to ERISA plans may consider ESG factors that are either irrelevant to financial considerations or even detrimental. That guidance, he said, would be inconsistent with the requirements of ERISA, which requires fiduciaries to manage plans solely for the purpose of maximizing their beneficiaries' retirement income.