United States: MFA Cautions Against Requirement For Asset Managers To Include ESG Factors

The Managed Funds Association ("MFA") cautioned against measures that would require asset managers to incorporate "overly prescriptive" environmental, social and governance ("ESG") factors into investments.

In a comment letter, the MFA addressed the European Securities and Markets Authority's ("ESMA") proposal to integrate "sustainability risks" into the UCITS/AIFMD Consultation and the MiFID II Consultation. The MFA contended that asset managers should discuss with their clients whether the manager's products and services satisfy the client's ESG factors. Using this approach, the MFA noted, will better ensure that asset managers include ESG factors and considerations to the extent they align with the client's investment goals.

The MFA encouraged the ESMA to abstain from including "broad wording" in the proposed amendments that would obligate all investment managers to consider ESG preferences as part of their UCITS, AIFMD or MiFID II requirements. The MFA further said that it is critical for ESG factors not to be interpreted as "automatically taking precedence over other investment objectives."

Commentary

While the Managed Funds letter offers a number of practical suggestions to mitigate the serious potential harms of investing in accordance with ESG dictates—in particular, its suggestion to avoid "overly prescriptive" measures in this area—perhaps a more fundamental critique is in order. In a speech delivered last fall, SEC Commissioner Hester Peirce presented just such a critique, arguing that "[r]equiring a company to . . . cater to other interests," such as those associated with ESG values, "risks compromising not only its shareholders' interests, but the public interest as well."

In her speech, Commissioner Peirce addressed some of the fundamental problems associated with ESG investing, including the fact that ESG standards are neither uniform nor objective, and that realizing them will often place investment managers in conflict with their duty to act in a fiduciary manner. For example, what constitutes "ethical and good" values, as Ms. Peirce observes, may "reflect personal moral beliefs that may not be universally held." This places companies at the mercy of standard setters whose values may hew not to the public at large, but instead to "what a select group of stakeholders believe to be good or moral behavior." Further, elevating the interests of certain stakeholders over all shareholders, according to Commissioner Peirce, makes "the law complicit . . . in a breach of fiduciary duty." Finally, there is the problem of lack of expertise that leaves most firms ill equipped to make these determinations, or as Ms. Peirce puts it, do we really want "a company that brews beer . . . to assess what energy source would be the best for the environment?"

The same conceptual problems afflict efforts to dictate ESG standards on financial reporting. As Ms. Peirce notes: "In many instances, ESG reporting has been presented as though it were comparable to financial reporting, but it is not. While financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled."

In the end, perhaps the goal should be more modest. For, as Commissioner Peirce observes, "[a] company that serves the interests of its collective shareholders serves the interests of the public."

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