ESG Flu in North American Corporate Investment Management

Regarding financial management regulation in North America, people often say that when the United States sneezes, Canada gets the flu. After Canada got the flu, the United States invented a drug to treat it.

March 2021: ESG flu breaks out in Canada. In March 2021, following a multi-provincial and wide-ranging ESG jurisdiction battle, the Supreme Court of Canada upheld the constitutionality of the federal government’s regulatory powers over pollution pricing granted by the 2018 Greenhouse Gas Pollution Pricing Act.

Carbon knows no borders. At the same time, in West Virginia, an anti-ESG (environmental and social governance) state regulatory movement began.

The Canadian provinces that appealed in the case were Ontario, Alberta and Saskatchewan, which claimed exclusive jurisdiction over carbon offset pricing but lost their appeal at the Supreme Court. The ruling ultimately recognized the traditional constitutional principle that provinces and the federal government share environmental jurisdiction, but also reaffirmed the federal role in unifying environmental struggles across the country. British Columbia is also a party but is challenging a lower appeal court’s declaration of unconstitutionality in a federal law that originated in neighboring and rival Alberta. Finally, the Supreme Court of Canada ruled that a 2018 federal law ensures a standardized pricing mechanism for carbon pollution emissions that applies across the country.

However, the funds collected by the federal government will be used directly to combat climate change, providing each province with the equivalent of what each region collects separately. If redistribution is effective, the jurisdictional issue is one of power and ability to determine prices.

January 2022: First sanctions for anti-ESG remedies. The anti-ESG debate that began in West Virginia in March 2021 took six months to introduce Senate Bill 262, which was finally approved in January 2022. The first rule allows the state to create a list of financial entities accused of refusing financial transactions to energy companies using ESG as an excuse, such as those that harm the environment through pollution. Under Bill 262, listed financial entities must report these reasons within 45 days to prevent them from boycotting energy companies. The political and cultural underpinnings of anti-ESG have since recognized the need for a return to true capitalism, one in which investments are not constrained by the advances of “woke corporate capitalism.”

Sources of infection: ESG social issues and retirement fund management. Woke corporate capitalism is a critical and radical term invented by liberal governments to question the cultural conflict between profit maximization and social good or corporate performance. Last year, the U.S. Department of Labor reiterated regulations requiring managers to consider ESG factors within the legal framework of fiduciary duties established by the Employment and Retirement Security Act of 1974.

The rules impose an obligation on them to act strictly in the interests of the beneficiaries of these pension and retirement funds. This age-old and logical rule of trust management has been challenged by injunctions in 25 states in recent years. Is it fair to limit a retirement fund’s fiduciary stewardship responsibilities solely because of ESG factors?

2023: Production of anti-ESG drugs.However, in March the Kentucky government passed Bill 236, which prohibits the inclusion of ESG factors that are not directly related to the profitability of pension fund investments, reaffirming the

Administrators’ fiduciary duties in favor of pensioners. Ohio and Missouri, like Kentucky, have enacted their own laws, while California and New York have retained different interpretations by maintaining zero-carbon rules in their portfolios. In the arguments in favor of approving the anti-ESG law in Utah law, some emphasize that ESG does not represent a theory but a conspiracy reality against capitalism. In Florida, a new law prohibits banks from using social credit scores to make decisions about approving private loans.

In addition, legal authorities in Arkansas, Indiana, Texas and Louisiana have consistently opposed public pension administrators’ selective investment strategies based on ESG factors.

ESG contagion: punctual or widespread? Business ethics, human rights, the environment, social diversity and inclusion are factors that expand the scope of ESG operations, steering this high-pressure cultural discussion into legal debates about the need for different legal frameworks to control “contagion”.

In Canada, for example, the priority of integrating Indigenous First Nations into all areas of national economic development is explained as a specific element of ESG included in the reconciliation process. In fact, since August 2021, Canada has put in place legal requirements for all of its federal agencies to ensure that at least 5% of the value of all state contracts is with Indigenous Nations. Legal efforts to incorporate local considerations into ESG seem excessive and dangerous. This is an exaggeration because it is not necessary, as there is an autonomous legal framework for the regulatory protection of these rights. The danger is that thinking that Aboriginal issues are part of the ESG movement will limit Aboriginal rights – which are central to Canadians’ legal lives – from participating in cultural debates about competing interests. Debates within Aboriginal legal frameworks have been resolved and cannot be exposed to, for example, anti-ESG legal responses.We don’t want to go back to injustice

Do we have an equitable way to cure ESG? Anti-ESG measures reflect a capitalist policy response aimed at protecting managers’ fiduciary responsibilities to maximize investment outcomes. ESG is not an excuse for poor business.

These measures are based on analyzing the risks of sustainability concepts being misinterpreted as the need to protect future generations.

There is a need for a substantial double standard on the legal definition of ESG. In addition to the obligation to report on ESG behavior in securities markets, regulators must also consider this analytical risk in order to mitigate the impact or delegate it to other specialized agencies.

In February 2022, the U.S. Supreme Court issued a ruling in the case of West Virginia v. United States. The Environmental Protection Agency believes that it is inappropriate for state governments to revoke the authority to control carbon emissions from specialized agencies. It is not recommended to replace the agency’s Clean Power Plan, which is an expert in assessing and forcing energy companies to reduce carbon dioxide emissions.

Identifying and applying ESG factors is dangerous for non-professional regulatory bodies such as financial market regulators, who know next to nothing about ESG. These factors can only be controlled by other expert agencies. Otherwise, we will regulate financial markets through ignorant debates about ESG, applying its factors for the sole purpose of mandating investment management.

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