SEC and Asset Funds Should Reconsider NetZero Advocacy — It Harms Shareholders

As a new administration prepares to take over, the future of climate policy is uncertain. This question is particularly relevant given its minimal presence in the recent election discussions.

A recent Gallup poll regarding the significance of various issues ranked “the economy” as the top concern among 22 topics, with “climate change” positioned at 21st place.

The incoming President, Donald Trump, has announced that the United States will not be participating in the Paris Climate Agreement nor in the United Nations’ NetZero 2050 initiative, which mandates nations to reach net CO2 emissions levels by 2050.

However, several major fund managers, such as BlackRock, State Street, and Wellington, have differing views. They belong to groups pledging to encourage the companies they invest in to adhere to the NetZero 2050 goals.

Fund managers serve as fiduciaries, tasked with acting in the best interest of their investors, primarily by securing the highest possible financial return.

Encouraging companies to comply with the costly mandates of the Paris Agreement contradicts this responsibility.

For instance, consider an investor who supported Trump. She has entrusted her retirement savings to a fund manager who is part of these consortiums.

Like many, she may not be aware of these groups’ existence. Unbeknownst to her, her fund manager is utilizing her investments to pursue objectives that she likely does not endorse, potentially compromising her financial well-being.

How can the fund manager claim to meet its fiduciary duties?

These consortiums wield substantial power. As more investors hold shares indirectly via investment funds, it falls upon fund managers to execute corporate votes.

These groups collectively command enough shares to sway corporate policies and influence board member selections. For instance, Climate Action 100+ comprises over 700 investors with a combined $68 trillion in assets. Meanwhile, the NetZero Assets Managers Initiative includes 325 fund managers managing over $57 trillion in assets.

Recently, BlackRock, State Street, and JP Morgan made headlines by exiting Climate Action 100+ after the organization began to mandate that some members engage with policymakers and disclose their discussions regarding NetZero 2050 with the companies they invest in.

Nonetheless, all three remain members of the NetZero Assets Managers Initiative, which lacks such requirements.

Some consortium members have encouraged the Securities and Exchange Commission (SEC) to implement measures that further their climate agenda.

In March 2024, the SEC approved its contentious climate-change regulation, necessitating companies to address climate change in their annual reports and registration statements.

Prior to this rule, companies were only required to report any risk deemed material to their business. If a firm recognized climate change as a significant potential cost or benefit, they needed to report that.

However, if a firm does not perceive climate change as a pressing issue, why should they be obliged to include it in their annual report? The new regulation mandates that they must.

The SEC’s role is not to act as an environmental regulator. Its purpose is to guarantee that firms provide accurate information so investors can make well-informed decisions.

It should not dictate to thousands of firms what risks they should assess, concerning climate or any other category.

Regarding climate risks, companies typically don’t extend their financial forecasts 75 years into the future.

A report from President Biden’s Council of Economic Advisers reviewed 12 peer-reviewed studies concerning the financial implications of climate change. The general consensus estimated that costs would amount to less than 2% of GDP with a temperature increase of 4.5 degrees Fahrenheit compared to preindustrial levels, roughly aligning with UN projections by 2100 under plausible emissions scenarios.

If this is accurate, the economic repercussions of climate change may not significantly impact our lives for quite some time.

Conversely, the expenses related to climate-mitigation policies could be substantial.

Great Britain officially adopted the NetZero 2050 policy and now faces the highest electricity prices in the developed world, approximately five times those in the United States.

Elevated energy costs result in increased prices and slower economic growth. American voters appear disinterested in this costly tradeoff.

It is hoped that fund managers will revert to a strict adherence to fiduciary duties. Such a return would strengthen the principle of specialization of labor, as eloquently described by Adam Smith.

Accountants handle your taxes. Dentists maintain your dental health. The SEC oversees matters related to finance and accounting.

Fund managers should primarily focus on securing the optimal financial returns for their clients.

R. David McLean is the author of “The Case for Shareholder Capitalism: How the Pursuit of Profit Benefits All,” recently published by the Cato Institute.