Based on a non-fiction book of the same name by historian Cornelius Ryan, A Bridge Too Far is a 1977 epic war film depicting Operation Market Garden, a failed Allied operation using paratroopers to secure three bridges over three key rivers in Nazi-occupied Netherlands during World War II.  The phrase has come to mean “a long shot”, or an overly ambitious plan.

The metaphor can now be applied to 2023 regarding the onslaught of ESG bureaucratic regulation burdening enterprises around the world. Jon McGowan explains in his Forbes article The SEC’s New Rule May Inadvertently Kill ESG Funds.  Excerpts in italics with my bolds and added images.

 Securities and Exchange Commission recently announced a rule requiring environmental, social, and governance funds to be 80% aligned with the fund’s stated goals. This could reveal a long-held secret of ESG funds: to be competitive, they are packed with more profitable investments that are not green.

ESG is a type of investing where non-financial factors
are considered in the decision-making process.

ESG has grown quickly over the past few years, pushed by global action to meet the net zero goals of the Paris Accords. Globally, those non-financial factors are primarily focused on sustainability. However, in the US there has been an added focus relating to LGBTQ+ issues that some have deemed political, causing controversy.

The growth of ESG has sparked regulation for sustainable reporting standards for businesses. The European Union was the first, with the European Sustainability Reporting Standards that were approved in July and set to go into effect January 1. The ESRS will require publicly traded and large privately held companies to report greenhouse gas emissions, actions taken by the entity to reduce GHG emissions, and other green policies. Eventually it will expand to small and medium-sized enterprises. While reporting will be mandatory, no environmentally friendly action is required. The SEC is set to release similar standards for the US in October.

[Note: Bloomberg reports this week Banks May Escape EU’s Toughest ESG Regulation So Far  Lawmakers, member states are negotiating due diligence rule
Firms face new civil liability, large fines under the proposal

and EU Exchanges Face Delistings as ESG Rules Hit Multinationals
Non-EU firms are waking up to January compliance deadline
EU’s corporate reporting rules have met widespread opposition]

The increased interest in ESG caused fund managers and businesses to adjust their practices. This sudden shift raised concerns of greenwashing, or the exaggeration of environmentally friendly initiatives to appear greener than they actually are. A new term, climate washing, has recently developed that is specific to the exaggeration of climate change initiatives.

Greenwashing for marketing purposes, while misleading, rarely met the standard of a regulatory violation. However, when greenwashing is directed at investors it could violate financial regulations and fall under the authority of the SEC. The SEC recently fined Deutsche Bank’s investment arm, DWS, $19 million for “materially misleading statements” relating to greenwashing in ESG funds. However, enforcement is problematic as the threshold for what constitutes greenwashing was not previously defined.

That changed when the SEC announced a new rule that requires ESG funds to match at least 80% of their portfolio with the stated goals of the fund. This new rule came just weeks after the SEC issued a round of subpoenas to an unknown number of fund managers relating to their ESG fund practices.

While the 80% requirement will settle greenwashing concerns,
it could be problematic for the viability of ESG funds.

Environmentalist and aligned organizations have frequently expressed concerns that some ESG funds were stacked with investments that were contrary to sustainable goals. A 2022 study by ESG Book found that ESG funds on average produced 14% higher GHG emissions than traditional funds. The same study found ESG funds investing in mining and fossil fuels, including Shell, Exxon Mobile, and BHP Group. The ESG Book study is not alone or new. Multiple studies have been released by environmental think tanks chastising ESG funds for not being sustainable.

Fund managers are placed in a precarious position of trying to offer
environmentally friendly funds, while also
meeting their fiduciary duty to maximize returns.

In doing so, they are forced to offset the underperformance of sustainable investments with investments in companies that are high profit, but contrary to the green goals. The result is funds that are not truly green, but greenish.

The new SEC rule will force fund managers to limit that practice to 20% of the fund. The unsettled question is how that will impact returns. ESG funds already underperform compared to traditional funds, the 80% rule may make them no longer a viable investment.

Background:

SEC Warned Off Climate Disclosures