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AG Morrisey continues multi-state campaign against proposed SEC climate change rules; leads coalition in third letter

MORGANTOWN – State Attorney General Patrick Morrisey announced on Wednesday another step in a multi-state campaign against the U.S. Securities and Exchange Commission’s plan to step into the area of climate change regulation.

Morrisey led a 21-state coalition in a letter providing comments on the SEC’s proposed rule for investment funds that consider Environmental, Social and Governance (ESG) factors in their investment decisions.

This is the third letter the coalition has sent to the SEC since June, with the previous two addressing a proposed companion rule.

“This proposed rule is nothing but another attempt from Biden’s administrative state to target fossil fuel companies as part of a larger partisan strategy,” Morrisey said. “It violates the major questions doctrine, which was settled when we won our U.S. Supreme Court case in West Virginia v EPA, confirming that U.S. Congress — not a federal administrative agency — has the power to decide major issues of the day.”

The proposed rule is called “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.”

The letter explains that the proposed rule creates a three-tier spectrum for funds that use ESG factors. One, Integration Funds use ESG factors in investment decisions. Two, ESG-Focused Funds focus on ESG factors “by using them as a significant or main consideration.” And three, Impact Funds are ESG-Focused funds that also seek to achieve a specific goal.

Integration Funds will have to “summarize in a few sentences how the fund incorporates ESG factors” in their prospectuses. It imposes extensive new methodology requirements on Integration Funds that consider the greenhouse gas emissions of portfolio holdings, the letter says.

ESG-Focused Funds will have to “provide specific disclosures about how the fund focuses on ESG factors in its investment process” in their prospectuses, including an “ESG Strategy Overview Table.”

Impact Funds must follow all the new prospectus rules for ESG-Focused Funds and must also “clarify the impact the fund is seeking to achieve” and include disclosures on “how the fund measures progress towards the stated impact.”

The letter says, “But perhaps the most burdensome requirement in the new disclosures is a familiar one now: required emissions disclosures. In particular, ESG-Focused Funds and Impact Funds that consider environmental factors must ‘disclose the aggregated [greenhouse gas] emissions of the portfolio.’ “

In the opinion of the authors, “The proposed rule here continues the Commission’s recent attempt to transform itself from the federal regulator of securities into the regulator of broader social ills. This time, the SEC has imagined that the market requires more Environmental, Social, and Governance disclosures from investment managers.

“But these disclosures—distant from areas of ordinary finance—are well outside the SEC’s area of expertise. ‘Congress created the SEC to protect investors and financial markets. [A court ruling said]’ The proposed rule may not be as egregious as some of the SEC’s other recent efforts in that it does not purport to regulate essentially the entire American economy—but that is about the most that can be said for it.

Along with violating the Major Questions Doctrine (requiring clear Congressional directive for agency action in certain extraordinary cases), they say, the proposed rule exceeds the SEC’s statutory authority, violate the First Amendment and is arbitrary and capricious.

Among the other states on the letter are Arizona and neighbors Virginia and Kentucky.

Previous letters

The previous two letters dealt with a different proposed rule: “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”

That 500-page rule would require, among other things, describing company leadership’s role in managing climate-related risk, disclosing targets, goals and methods for reducing greenhouse gas emissions, and disclosing actual and indirect greenhouse gas emissions and the intensity of the emissions in terms of their costs as a factor of revenue.

Companies would have to disclose the consequences of severe weather events and natural disasters, financial fallout from “transition” activities, and the results of identified climate-related risks or opportunities. They would need to disclose what they are paying to mitigate the risk of either severe weather events or “transition risks.” And they would need to explain how severe weather events and transition activities affected any estimates or assumptions in their financial statements.

The first letter was sent in June, with 22 states signing on, co-led by Arizona and including Virginia, Kentucky and Ohio. The second was sent in July following the states’ victory in WV vs. EPA, emphasizing that victory and the Major Questions Doctrine.

They said, “This effort reflects agency mission creep of the worst kind. The administration has tried and failed to impose regulation directly, and it now appears content to use back-door financial regulatory actions to implement its political will. But it is up to lawmakers to decide major policy questions like these, not unelected agency administrators.”

They continue, “But powerful forces in Washington and New York don’t lead our free-market economy. Publicly listed companies are not agents of the state. And we oppose any effort to use the Commission to lock out the blue collar enterprises and Main Street investors that actually drive this country.”

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