Many investors who worry about the effect of systemic threats on their portfolios have relied on the government to curb corporate conduct that undermines critical systems. At The Shareholder Commons, we have always believed that investors have their own important role to play in guarding the global commons shared by investors and other stakeholders.
But whatever one’s view on this debate might have been in the past, recent U.S. Supreme Court decisions compel the conclusion that investors can no longer cling to the promise of regulation to constrain U.S.-based enterprises’ activities that threaten the portfolios of their beneficiaries and clients. The new case law will hamstring domestic regulators, leaving investors with no choice but to steward the companies they own to protect the systems we all rely on for a stable economy. Going forward, investors must exercise their voting and other rights to thwart business practices that plunder the resources and systems on which we all depend for our prosperity.
Dismantling the Administrative State
In recent years, the U.S. Supreme Court has issued numerous decisions that limit regulatory authority over business. These limits license companies to degrade the social and environmental systems upon which our economy depends. At the end of its most recent term, the Court produced multiple decisions that will accelerate this process.
The case with the highest profile was Loper Bright Enterprises v. Raimondo, in which the Court undercut the authority of federal agencies by eliminating the principle of “Chevron deference,” which required courts to defer to the expertise of agencies when interpreting ambiguous statutes. Overruling this 40-year-old precedent could lead to the elimination or weakening of thousands of rules on the environment, health care, worker protection, food and drug safety, the financial sector, and more, thus hobbling efforts to constrain climate change, income inequality, antimicrobial resistance, and other systemic threats.
But eliminating Chevron was not the Court’s only tool for attacking what opponents of regulation call “the administrative state.” In Corner Post, Inc. v. Board of Governors, FRS, the court held that old regulations could be challenged by new companies, evading the statute of limitations and creating perpetual uncertainty for businesses and regulators. In a third case, SEC v. Jaresky, the Court severely limited the ability of agencies to impose fines for regulatory violations. Justice Sotomayor’s dissent laid out the danger to functioning government:
[H]undreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress… Litigants seeking further dismantling of the “administrative state” have reason to rejoice in their win today, but those of us who cherish the rule of law have nothing to celebrate.
A fourth case, Ohio v. EPA, invalidated a rule that limited states’ emissions that polluted downwind states. The ruling elicited a dissent from Justice Barrett, who recognized the need for an overarching authority to address externalities that states might impose on one another:
But States also face an externality problem… [T]he Court’s injunction leaves large swaths of upwind States free to keep contributing significantly to their downwind neighbors’ ozone problems for the next several years…
Justice Barrett thus identifies the overall problem with the Court’s mission to undermine regulators: without expert-designed limits that set boundaries that protect everyone, individual actors will inevitably impose costs on others in pursuit of their own needs.
All these cases follow West Virginia v. EPA, the 2022 Court decision invalidating a carbon-reducing regulation because it purportedly addressed a “major” question not expressly covered by Congressional language. In a strong dissent, Justice Sotomayor identified the critical role played by expert regulation, and the risk of upending that role:
Today, one of those broader goals [of the Court] makes itself clear: Prevent agencies from doing important work, even though that is what Congress directed. That anti-administrative-state stance shows up in the majority opinion, and it suffuses the concurrence…
Over time, the administrative delegations Congress has made have helped to build a modern Nation. Congress wanted fewer workers killed in industrial accidents. It wanted to prevent plane crashes, and reduce the deadliness of car wrecks. It wanted to ensure that consumer products didn’t catch fire. It wanted to stop the routine adulteration of food and improve the safety and efficacy of medications. And it wanted cleaner air and water. If an American could go back in time, she might be astonished by how much progress has occurred in all those areas. It didn’t happen through legislation alone. It happened because Congress gave broad-ranging powers to administrative agencies, and those agencies then filled in—rule by rule by rule—Congress’s policy outlines…
The subject matter of the regulation here makes the Court’s intervention all the more troubling. Whatever else this Court may know about, it does not have a clue about how to address climate change.
And let’s say the obvious: The stakes here are high. Yet the Court today prevents congressionally authorized agency action to curb power plants’ carbon dioxide emissions. The Court appoints itself—instead of Congress or the expert agency—the decisionmaker on climate policy. I cannot think of many things more frightening.
It all begs the question: While the government of the world’s largest economy works its way through the tremendous upheaval and dysfunction that will almost certainly ensue, how long are investors willing to sit on their hands while average global temperatures continue to rise, poverty wages impose mounting costs on GDP, antimicrobial resistance erodes a pillar of modern medicine, and corporate cost externalization continues to exacerbate an expanding roster of systemic risks that threaten diversified portfolio value?
At some point, institutional investors with U.S. exposure must recognize that help is not coming from government quarters—at least not anytime soon. Without the safe workplaces, transportation, food, and medicine or the clean air and water made possible by limits on irresponsible corporate practices, the United States will be a much poorer economy, and investors will have less to show for their investments. With regulatory protection from corporate externalities (including carbon emissions) in doubt, investors must use the tools they have at their disposal to protect their portfolios from the value destruction that the new regulatory gap will create.
Calls to Action
What Can Investors Do?
Investors have a unique combination of power and incentive to rein in the types of behavior that regulation would, in an ideal world, address. They have the power through their collective ownership of companies around the globe that lead the world economy. They have the incentive because, for the most part, these investors are diversified, and when individual companies profit by extracting value from the systems that support the global economy, their entire portfolios are put at risk. We have addressed this potential at length in this Congressional testimony.
Here are some actions institutional investors can undertake to begin addressing the regulatory gap:
Investment Beliefs and Proxy Voting Guidelines
Adoption of proxy voting guidelines along the lines set forth in this model will give staff and advisors the direction they need to act on systemic issues and ensure trustees have accounted for the full effect of their stewardship choices.
Asset Management
We’ve developed model language that can be adapted to use in an asset-management mandate to ensure the manager is authorized to practice system stewardship.
Guardrails
Guardrails allow investors to establish uniform limits on corporate behaviors that excessively externalize social and environmental costs. Guardrails can raise minimum performance expectations, providing investors and companies with confidence that financial success at a company must be built on efficiency and innovation, not externalization of social and environmental costs.
All portfolios depend on a healthy society and environment, meaning systemic risks can’t be avoided through security selection or mitigated by diversification. Investors’ primary implementation mechanism for companies that don’t conform to a guardrail is engagement and proxy voting (against directors, for shareholder proposals). The Shareholder Commons is currently supporting investors in running two guardrails: one on antimicrobial resistance and the other on poverty wages.
We have more tools on our website, and are happy to help investors work through the process of adopting a system stewardship approach. As always, we welcome your thoughts and feedback.
