Comments to the SEC regarding the proposed rule.

Created on 2022-08-17 15:57

Published on 2022-08-17 18:27

Re: File Number S7-17-22 Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices

Dear Commissioners: 

Thank you for soliciting public comment on this proposed rule. I have read the thoughtful and thorough rationale for the proposal and would like to focus on one weakness that the SEC may wish to address prior to finalizing the rule.

My comments are primarily directed at the reporting requirements set forth for ESG-Impact funds, from which retail investors may expect significantly more observable and measurable results compared to ESG-Focused or Integrated funds. My concerns relate to the evaluation and reporting of ESG measures within the whole value chain. The term “value chain” is used a handful of times on page 343 of the proposed rule and appears in two footnotes. It is defined as follows: “Value chain means the upstream and downstream activities related to a portfolio company’s operations. “

As I understand the rule, it requires ESG Impact investment funds to report on the ESG impacts of each company in the portfolio. Information can be compiled from varied sources, including the portfolio company itself or third-party providers, as long as the methodology and participants are adequately disclosed. However, as part of my value chain work for a national food retailer and with several advocacy groups, it is clear to me that the methods used to establish a positive narrative for ESG efforts are widely gamed.

At the core of these methods is re-setting the baseline at each step in the value chain. For instance:

• British Petroleum claims to be a sustainable company because it is not as bad now as it was at the time of the Deepwater Horizon disaster and has diversified into some wind and solar power generation.
• Nutrien, CF Industries and other “sustainable chemical” companies that convert non-renewal natural gas to anhydrous ammonia also claim to be sustainable based on using “clean” natural gas to produce a fertilizer for corn, most of which is converted to ethanol fuel at a ratio of 2 units of energy in to 1 unit out.
• Bayer and Syngenta brag loudly about their “regenerative” and “sustainable practices”, in spite of forcing the loss of biodiversity and a ten-fold increase in toxic pesticide use to support their proprietary GMO seeds and herbicides.
• Archer Daniels Midland and Cargill proudly promote their “sustainable and environmentally friendly” conversion of corn into High Fructose Corn Syrup (glucose/fructose), an ingredient responsible for the poor nutritional value of most processed foods.
• Perfect Day, Zero Acres, and Impossible Foods claim the prize for responsible ESG, because their supply chain apparently begins when the receive on their dock the corn syrup used to feed their synthetic protein fermentation vats. They never recognize, let alone report, that their fermentation steeps are made with High Fructose Corn Syrup derived from chemical-intensive GMO corn fed synthetic nitrogen made from fracked natural gas. Those activities and the damage they cause to social and environmental outcomes do not appear on the P&L, or the Balance Sheet, or in any ESG report provided to an investment fund. Nor do these companies report on the problems associated with the end of their value chain, wherein they must quarantine and destroy biohazard fermentation waste. And, finally,
• Brave Robot ice cream uses the synthetic whey created by Perfect Day but makes no acknowledgement whatsoever of the value chain the ingredient comes from.

Here is a flow chart of the synbio value chain as compiled from dozens of patents:

At each step in the value chain, portfolio companies tend to reset the baseline measure used for comparisons and ignore the cumulative negative effects of their value chain. Everybody gets to be green.

Yet, Brave Robot and other portfolio companies are likely to say nothing about these ESG consequences of its business practices:

• Waterways, aquifers, land, and air polluted by fracking and natural gas production.
• Destruction of aquatic and coastal environments by oil spills and leaching nitrogen fertilizer and pesticides.
• Reduction in community vitality and local sovereignty in rural areas where industrial GMO monoculture farming abounds.
• Loss of topsoil, healthy soil structure, and food nutrition due to decades of herbicide and synthetic fertilizer application.
• Release of legacy carbon into the atmosphere resulting from energy production and abused soil.
• Exploitation of agricultural workers from low pay and poor working conditions.
• Exploitation of taxpayers to pay for benefits and social services required by exploited workers.
• Production of bio-hazard waste steeps containing unknown and potentially dangerous living modified organisms, metabolites, prions, and altered gene segments.

 In fact, here is how Perfect Day markets their ingredients to shoppers:

“Put sustainability at the center. Integrating ESG into the core of products is both expected and the right thing to do. Bring planet-positivity to the heart of your products.”

And note the use of the term “stable” in place of “sustainable” in this graphic:

Finally, third party ESG verification organizations may actively greenwash the industries that underwrite them.

The Global Roundtable for Sustainable Beef, for instance, writes extensive reports on its “regenerative” pastoral cow-calf operations while glossing over the practice of concentrating young animals in feedlots where they are administered antibiotics and hormones to grow to market size in record time. No mention of antibiotic resistance, fetid contaminated manure lagoons that are liquefied and sprayed back onto cropland, or the monopoly capture of the market used to force calf prices down to below cost. GRSB is the great third-party apologist for least ESG-friendly livestock production practices, yet under the proposed rule an investment fund can defer to them to support glowing ESG claims.

GRSB web site claims it is “Ensuring the beef value chain is a net positive contributor to nature” and is heavy on positive language, but fails to address the negative effects of concentrated feeding operations through which over 84% of beef cattle will be fattened and processed.

“Many producers and farmers are already net positive contributors to nature. GRSB members will finance, source, develop, support, and share practices throughout the entire value chain.”

In short, as strong as the SEC’s draft rule is, it leaves open wide loopholes through which both investment funds and portfolio companies will lead retail investors by the nose to untruthful and misleading ESG disclosures.

The only fix is to require the portfolio companies themselves to disclose each and every step in their respective value chains, and account for all of the ESG practices in them. The three GHG scopes in the proposed SEC rule on Climate reporting is a first step, but as shown in the examples above, there is a lot more transparency to required before we get to meaningful disclosures.

And, these investors and portfolio companies should no longer hide behind private offerings and NDA non-disclosure agreements. Show your cards. Shoppers should know the risks and consequences of their choice – before they buy.

Thank you for your consideration, and good luck.

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