How Natural Asset Companies Fail the Legal Litmus Test 

On January 17, 2024, the New York Stock Exchange (NYSE) withdrew its proposal to create natural asset companies (NACs). NACs were proposed by the NYSE as publicly traded businesses that could purchase rights to private or public land for ecological conservation.  

The stated purpose of NACs was to “maximize ecological performance.” A NAC would essentially be driven by a sustainability thesis aimed at the preservation and growth of its environmental holdings.  At the same time, NAC-acquired land would be inaccessible for resource extraction activities, such as fracking, drilling, logging, and mining. 

Listing NAC equity securities on the NYSE as drafted in the proposal could have exposed NACs and their institutional investors to legal liability. One criterion of the Howey Test, the legal standard for determining whether a transaction is an investment contract, is the expectation of profits. In one case, the U.S. Supreme Court: 

looked at shares of stock in a low-income housing cooperative to see if the shares qualified as investment contracts under the Securities Acts. The Court held that the shares in question did not meet the expectation of profits requirement because the purchasers’ incentive in entering the transaction was to obtain affordable housing and not to earn a return. The Court thus examined the motivation of the investors rather than the form in which the return was received. 

The motivation was not to return profits to investors. Similarly, the language of the NYSE’s proposal implied that financial returns were not a priority. The NACs would have been required to “conduct sustainable revenue-generating operations,” but only “where doing so is consistent with the company’s primary purpose,” which would have been “to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” Revenue-generating activities were only an ancillary consideration, not the primary motive for creating NACs. This calls into question whether NAC securities would have even been considered investment contracts.

When the proposal discusses topics of revenue-generating operations it provides one suggestion for NACs: carbon markets—a market where NACs sell emission rights. Carbon markets, which enable the sale of carbon dioxide emission rights, are artificial markets sustained by government regulations. The demand for carbon credits reflects market distortions created by rent-seeking for the green industry. Carbon credits are an avenue for corporate and individual virtue signaling. It is not clear how NACs could generate long-term shareholder value or financial returns for investors. 

As drafted, the proposal could have exposed a NAC’s institutional investors to legal liability under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA establishes fiduciary standards for private employer-sponsored retirement plans. In 2014, the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer ruled in favor of the bank’s employee who argued that the bank violated its ERISA-mandated fiduciary duties. The court’s interpretation of ERISA determined that investment decisions undertaken by administrators of retirement benefit plans must be financial in nature. 

Fiduciaries of defined contribution plans such as 401(k)s or other ERISA-regulated plans invested in NACs could be exposed to violating their fiduciary duty because they would not be investing solely in the interest of plan beneficiaries for the exclusive purpose of providing benefits—benefits that according to the court need to be exclusively financial.  

NACs provide no conceivable financial benefit to American workers or their nest eggs. That fact alone is enough to discredit NACs and advise against any reintroduction of the proposal.