Honeycutt – Winter 2024

Natural Asset Companies: ESG Bogeyman Suffers Political Demise

Joe Honeycutt

On October 4, 2023, the Securities and Exchange Commission (SEC) published for comment a proposed rule change to amend the New York Stock Exchange (NYSE) Listed Company Manual to allow for the listing of Natural Asset Companies (NAC).[1] The proposed rule change described NACs as “corporation[s] whose primary purpose is to actively manage, maintain, restore, and grow the value of natural assets and their production of ecosystem services.”[2] On December 21, 2023, the SEC began proceedings to determine whether to approve or disapprove the rule change and on January 17, 2024, the SEC withdrew the proposed rule.[3] Neither the NYSE, SEC, nor Intrinsic Exchange Group (IEG), the proposal’s sponsor, have publicly commented on the reason for withdrawing the rule change.[4] However, prior to its withdrawal, the NAC proposal drew criticism and concern from several groups of Republican elected officials,[5] as well as property rights and extractive industry advocates.[6] NACs were almost certainly not a single, catch-all solution for funding environmental conservation and suffered from legitimate concerns about the market’s ability to hold them accountable. However, they were not the property rights and national security-threatening bogeyman their critics feared. To the extent that those fears translated into political or economic pressure to withdraw the proposed rule, its demise represents a victory for misplaced fear as a cudgel against market-based conservation efforts.

According to the NAC proposal’s sponsor, Intrinsic Exchange Group (IEG), NACs are a “voluntary, market-based solution that can be used to protect and grow the natural assets under management, nurture healthy ecosystems, build wealth, and foster livelihoods that work with nature rather than simply extracting from it.”[7] NACs would be corporate entities whose conservation-oriented purpose would be enshrined in its charter. A NAC would engage in revenue-generating operations only if they are sustainable and consistent with that purpose.[8] The funds raised through public offerings of NAC securities would be used to “implement the conservation, restoration, or sustainable management plans articulated in its prospectus, fund its ongoing operations, or otherwise fulfill its purpose to maximize ecological performance.”[9]

Under the proposal, a NAC would be able to hold the rights to ecological performance (also called ecosystem services) produced by natural or working areas, either as a landowner or licensee.[10] Importantly, the proposal contemplated and allowed for a NAC’s licensing of public lands and capturing the economic value of preserving their ecosystem services.[11] Opponents of the NAC proposal portrayed this potential as an existential threat which would allow corporations to profit from “public goods” such as water or air.[12] However, this licensing of lands, public or private, can already be done through existing entities and practices. Any landowner may choose to designate their land for conservation or lease their land to groups for conservation through a conservation easement.[13] Indeed, the Bureau of Land Management (BLM) already proposed its Public Lands Rule, which would allow conservation leasing of federal lands by private parties.[14] The only difference with the NAC proposal is that a NAC could receive a market valuation of those preserved ecosystem services. There is no ownership of the air or water, only ownership of the perceived value of preserving them. Neither a NAC nor its shareholders would exercise any control over air or water that a landowner or lessee cannot currently exercise.

Opponents also claim that NACs threatened natural resources and agricultural industries by interfering with those designated uses, especially on public lands.[15] They assert that NACs could be used to repurpose lands currently used for grazing, agriculture, or mining in favor of conservation.[16] Here too, however, the NAC proposal did not constitute any new or novel threat to extractive or agricultural industries. IEG CEO Douglas Eger has stated that where public land leased or licensed by NACs already carried a multiuse designation, the NAC could not override or change that designation.[17] The rules of public land administration would still apply.[18] This is consonant with BLM’s proposed Public Lands Rule. In addition to allowing conservation leasing, the rule would put conservation on par with other uses in the FLPMA’s multiple-use framework.[19] BLM was quick to clarify in its proposal, however, that “the proposed rule does not prioritize conservation above other uses; it puts conservation on an equal footing with other uses.”[20]

Relatedly, Republican lawmakers warned of the potential for adverse foreign actors to use NACs as a vehicle to undermine American control and economic exploitation of its natural resources. House members warned that foreign interests would be allowed to “fund companies that will control public land and explicitly prohibit mineral production.”[21] Such “control” of public lands by NACs is overstated (see above). Additionally, any nefarious investment by foreign actors would either be reinforced by the market or susceptible to correction via a drop in share prices. NYSE-listed NACs would derive their share prices from the perceived value of the ecosystem services they protect.[22] If those ecosystem services are worth less to the market than the corresponding extractive opportunity costs, decreased share prices would drive capital elsewhere. One might counter by expressing skepticism at the market’s ability to accurately account or react to comparative value of extractive activities relative to ecosystem services. Yet, this really reflects a lack of confidence in the sufficiency and digestibility of NAC-required disclosures, not the land use control afforded by the NAC model.

The NAC proposal would also have required NACs to periodically publish information on the ecological performance of their natural assets, including biophysical measures and economic value of each of the ecosystem services produced by those natural assets.[23] The goal was to allow investors to gauge the ecological and economic effectiveness of their investments.[24] Concerns about the adequacy of this reporting framework are not unreasonable.[25] The proposal would require NACs to use IEG’s own Ecological Performance Reporting Framework,[26] which while based on UN-established natural capital accounting standards,[27] is untested at the scale of publicly traded securities exchanges. Neither does the NYSE itself possess institutional expertise or experience on conservation science. Furthermore, other existing conservation models face similar disclosure challenges. Carbon offsets famously lack uniform standards impact-measurement and transparency.[28] National capital markets already struggle to account for greenwashing by corporate actors. Accordingly, one might reasonably worry that market forces will be insufficient to hold NACs accountable for nefarious activity by foreign actors, well-meaning but subpar conservation performance, or greenwashing efforts by NACs’ corporate parents.

Such concerns might have spurred refinement of the disclosure requirements in the proposal, but the NAC proposal seems to have suffered a political, rather than good faith, demise. Its political opponents used exaggerated fears of foreign control, misleading warnings about infringement on property rights, and even unfounded theories about collusion between IEG and the Biden Administration[29] to stoke hostility toward the NAC model of market-based conservation. A letter from four Republican governors even claimed that NACs seemed like a “subverted, back door approach to apply Environmental, Social and Governance (ESG) principles to land use and management.”[30] While we may not know the real reasons for the NYSE’s decision to withdraw NACs, their downfall represents a battle won for extractive industries and the lawmakers who represent them.

[1] Proposed Rule Change to Adopt Listing Standards for Natural Asset Companies, 88 Fed. Reg. 68811 (proposed Oct. 4, 2023).

[2] Id.

[3] Notice of Withdrawal of Proposal to Adopt Listing Standards for Natural Asset Companies, 89 Fed. Reg. 4354 (Jan. 23, 2024).

[4] Noel Randewich, NYSE pulls plan for environmentally sustainable asset class, Reuters (Jan. 18, 2023), https://www.reuters.com/sustainability/climate-energy/nyse-pulls-plan-environmentally-sustainable-asset-class-2024-01-17/.

[5] Letter from Andrew Sorrell, Auditor, State of Alabama, et al. to Vanessa Countryman, Secretary, Securities and Exchange Commission (Jan. 17, 2024), https://treasurer.utah.gov/wp-content/uploads/NAC-Financial-Officer-Comment-Letter-January-2024.pdf; Letter from the House Committee on Natural Resources, U.S. House of Representatives to Hon. Gary Gensler, Chair, Securities and Exchange Commission (Jan. 11, 2024), https://americanstewards.us/wp-content/uploads/2024/01/2024.01.11_HNR-Letter-to-SEC-on-NACs.pdf; Letter from Pete Ricketts, United States Senator, to Commissioners, Securities and Exchange Commission (Nov. 2, 2023), https://www.risch.senate.gov/public/_cache/files/2/6/26ede68e-ff87-4f69-b00d-789beab76417/FD5F7F980A061BC97348F90EDE03593D.letter-to-sec-natural-asset-companies-final.pdf.

[6] Issue Briefing: SEC Proposed Rule for “Natural Asset Companies,” American Stewards of Liberty (Oct. 18, 2023), https://americanstewards.us/wp-content/uploads/2023/10/10-23-SEC-NA-Backgrounder.pdf.

[7] Intrinsic Exchange Group, https://www.intrinsicexchange.com/ (last visited Feb. 15, 2024).

[8] Proposed Rule Change to Adopt Listing Standards for Natural Asset Companies, 88 Fed. Reg. at 68811.

[9] Id at 68812.

[10] Id.

[11] Id.

[12] Letter from Andrew Sorrell, supra note 5, at 1.

[13] Dana Joel Gattuso, Conservation Easements: The Good, the Bad, and the Ugly, National Center for Public Policy Research (May 1, 2008), https://nationalcenter.org/ncppr/2008/05/01/conservation-easements-the-good-the-bad-and-the-ugly-by-dana-joel-gattuso/.

[14] Conservation and Landscape Health, 88 Fed. Reg. 19583, 19591 (Apr. 3, 2023) (to be codified at 43 C.F.R. pts. 1600 and 6100).

[15] American Stewards of Liberty, supra note 6, at 5.

[16] Id.

[17] Jennifer Yachnin, Invest in nature? Might be possible with ‘natural asset companies,’ E&E News (Dec. 11, 2023), https://www.eenews.net/articles/invest-in-nature-might-be-possible-with-natural-asset-companies/.

[18] Id.

[19] Conservation and Landscape Health, 88 Fed. Reg. at 19583.

[20] Id.

[21] Letter from the House Committee on Natural Resources, supra note 5, at 3.

[22] Intrinsic Exchange Group, supra note 7.

[23] Proposed Rule Change to Adopt Listing Standards for Natural Asset Companies, 88 Fed. Reg. at 68812.

[24] Id. at 68813.

[25] Letter from the House Committee on Natural Resources, supra note 5, at 2.

[26] Proposed Rule Change to Adopt Listing Standards for Natural Asset Companies, 88 Fed. Reg. at 68813.

[27] Id.

[28] See Alex Fredman & Todd Phillips, The CFTC Should Raise Standards and Mitigate Fraud in the Carbon Offset Market, Center for American Progress (Oct. 7, 2022), https://www.americanprogress.org/article/the-cftc-should-raise-standards-and-mitigate-fraud-in-the-carbon-offsets-market/ (describing the myriad factors which make carbon offsets particularly susceptible to fraud and manipulation).

[29] American Stewards of Liberty, supra note 6, at 5.

[30] Governor Greg Gianforte, et al., to Vanessa Countryman, Secretary, Securities and Exchange Commission (Oct. 25, 2023), https://www.sec.gov/comments/sr-nyse-2023-09/srnyse202309-281199-687142.pdf.

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