A looming ESG crackdown

This is an audio transcript of the FT News Briefing podcast episode: ‘A looming ESG crackdown’

Sonja Hutson
Good morning from the Financial Times. Today is Tuesday, August 15th, and this is your FT News Briefing.

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A surprise election result in Argentina spooked markets, and US regulators are investigating sustainable investment funds. Plus, iPhone manufacturer Foxconn is trying to pivot to India, but it’s not going to replace China any time soon. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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Markets in Argentina freaked out yesterday after a surprising result in the presidential primary election. Rightwing libertarian candidate Javier Milei came in first. He has threatened to, quote, “burn down the central bank”. Milei also wants to dramatically cut spending and align the peso to the US dollar. Argentina’s central bank responded to the market turmoil quickly. It devalued the peso by 18 per cent and raised interest rates by 21 percentage points. The shocking election result made investors even more anxious about the country’s economy. Inflation is running crazy, high above 115 per cent. The presidential election will take place in October.

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It looks like US regulators are about to crack down on how sustainable investment funds are marketed. The Securities and Exchange Commission sent subpoenas to several asset managers this year. The regulators are looking into their environmental, social and governance investing. You might also know it as ESG. The FT’s Patrick Temple-West has been reporting on this and he joins me now. Hey, Patrick.

Patrick Temple-West
Hi, Sonja. How are you?

Sonja Hutson
Doing well, thanks. So do you have a sense of what the SEC is looking for here?

Patrick Temple-West
Yes. The SEC has been looking for a couple of years on companies that say they’re doing something and not following through. If the funds are being fully transparent about what they’re doing in terms of ranking companies on ESG, screening companies on ESG, how they’re voting at companies’ annual meetings, or if asset managers have been a bit duplicitous about saying something and not following through on it. That’s what the SEC is looking for.

Sonja Hutson
Why has the SEC been focusing so much on ESG investing?

Patrick Temple-West
It’s been a booming part of the asset management industry. There has been a long secular decline into passive index investing, which there’s a race to the bottom among asset managers on fees. The ESG phenomenon came along and asset managers were like, aha, OK, well, here’s something we can do to justify a little bit higher fees by ranking companies on ESG metrics, screening companies, divesting from some companies and voting at annual meetings based on ESG criteria. If funds were able to charge a little bit more on fees and maybe not follow through, that’s an area where the SEC’s enforcement division is going to be interested.

Sonja Hutson
Patrick, has the SEC always been this aggressive with enforcement related to ESG or have we seen an escalation recently?

Patrick Temple-West
Definitely an escalation in the past two years. And there’s been questions about what the SEC is looking for here and how it will follow through on its commitment, which it started in 2021, to go hunting for potential greenwashing. Now we are starting to see the fruits of that. So the SEC has been ramping up and as the enforcement process works, these subpoenas are the next level up. It really shows the SEC is serious in getting the information that it wants to possibly bring an enforcement case.

Sonja Hutson
Patrick Temple-West covers corporate governance for the FT. Thanks, Patrick.

Patrick Temple-West
Thanks, Sonja.

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Sonja Hutson
The US government has agreed to settle the final case against Wall Street banks for their role in the 2008 financial crisis. UBS has agreed to pay almost $1.5bn to resolve the case. The Department of Justice accused them of defrauding investors by selling residential mortgage-backed securities deals. Those deals ultimately experienced huge losses during the housing crash. All in all, the DOJ reached settlements with 19 banks and rating agencies over the issue. Those groups paid more than $36bn for their misconduct.

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Taiwan’s electronics manufacturer, Foxconn, is trying to reduce its reliance on China. The iPhone manufacturer is looking to move more operations to India instead. This is partly in response to geopolitical tensions, but it’s also because Covid lockdowns in China caused major supply chain disruptions earlier in the pandemic.

Kathrin Hille
That meant that companies had their hands full doing crisis management and couldn’t do too much longer-term planning.

Sonja Hutson
That’s Kathrin Hille, the FT’s Greater China correspondent.

Kathrin Hille
So that situation is now over. And manufacturers like Foxconn have now gone back to addressing the longer-term challenge of diversifying their supply chain. We are seeing, for example, in India, rising pressure from companies like Apple to move forward with this diversification of the manufacturing footprint. And Foxconn, which is Apple’s largest contract manufacturer for the iPhone, for example, is now facing demands that they get ready to fulfil more iPhone orders from India or Vietnam or other locations outside China.

Sonja Hutson
Foxconn chair Young Liu said yesterday that the company is likely to invest billions of dollars in India.

Kathrin Hille
Mr Liu confirmed that they are planning to start producing consumer electronics components from next year in three different Indian states. So that basically means three new factories that would make mainly components for iPhones and other smartphones, because so far what they’re doing in India is assembly only. So most of the components and parts they assemble into the phones are still shipped from China. And both Apple and also Foxconn and also the Indian government are actually quite keen to change the situation so that there would be an increased level of value added in the country.

Sonja Hutson
But Foxconn still relies on plants in China for three quarters of its global operations.

Kathrin Hille
Most people who know the industry well believe that India will not be the new China, but rather will be one of several regional manufacturing hubs. And that is probably what global electronics manufacturing supply chains for the hardware tech industry will look like in the future. China will be joined by a larger number of other manufacturing hubs. And India will be one of them. And India has a very good chance to become a major one because it can contribute to the end demand for these devices because of its large domestic market. So it’s less of a gamble for these companies to invest because apart from exporting everywhere, they can also count on selling into the Indian markets itself.

Sonja Hutson
Kathrin Hille is the FT’s Greater China correspondent.

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You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.