It’s ESG Month in the House Financial Services Committee
For years, Republicans and Democrats, lobbyists, trade associations, and key industry players in the transportation and manufacturing sectors would gather in Washington, D.C. to celebrate “Infrastructure Week.” Advocates would applaud the positive impact infrastructure investment had on the U.S. economy and in communities across the country and would call for more dollars for the nation’s roads, airports, railways, tunnels and bridges. Passage of the Infrastructure Investment and Jobs Act in 2021 quieted those pleas.
Which means there is room inside the Beltway for a new type of “celebration”: ESG Month.
But this effort is not bipartisan. And, rather than working with industry players, it pits GOP lawmakers against the private sector. Specifically, ESG Month is an effort by House Republicans to examine the private sector’s efforts to elevate environmental, social, and governance (ESG) issues in their investment and business decision-making. GOP candidates have branded corporate ESG efforts as “woke capitalism” and have pledged to stop them.
Why are Republicans focused on this issue, what will ESG Month entail, and what is likely to come out of it? Let’s take a look.
The Origins of ESG Month
Conservative Republican Rep. Andy Barr (Ky.), who coined the term “ESG Month” and chairs the House Financial Services Committee’s (HFSC) Subcommittee on Financial Institutions and Monetary Policy, has called private sector ESG efforts “a cancer within our capital markets.”
Rep. Barr’s HFSC colleague, Rep. Bill Huizenga (R-Mich.), who chairs the committee’s ESG Working Group, agrees. “Across the nation, boardrooms are being held hostage by those who push policies that will lower returns for Americans trying to build a brighter and more financially secure future,” Rep. Huizenga has said.
Republicans argue corporate ESG efforts harm consumers, families, and investors.
The jury is out on whether these claims are true. As Reuters reported at the time, research released last summer showed stock funds that are weighted toward companies with positive ESG scores outperformed across global markets over the previous five years.
Other research begs to differ, however. An article published a few months earlier in Harvard Business Review said investors have not done that well when ESG is taken into account. In fact, the article argued, ESG funds “certainly performed poorly in financial terms.” The authors cited a Journal of Finance paper in which University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing more than $8 trillion in investor savings. “Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds,” the Harvard Business Review article reported. (That article also noted that, as of December 2021, assets under management at global exchange-traded “sustainable” funds that set ESG objectives amounted to more than $2.7 trillion.)
The jury also is still out on whether American voters approve of private sector ESG efforts.
According to a Gallup poll released in May 2023, 59 percent of Americans have “no opinion” of the movement to promote the use of ESG factors in business and investing. Gallup said the other 40 percent of voters were “about evenly divided between expressing a positive (22 percent) and negative (19 percent) view of the practice.”
A survey released earlier this spring by Pennsylvania State University found 72 percent of Democrats and 40 percent of Republicans believe investment managers should consider businesses’ environmental and social risks when choosing where to invest. Those numbers slide, however, when voters are asked to consider potential losses. At that point, as The Wall Street Journal noted, only 39 percent of Democrats and 23 percent of Republicans said they “would be willing to risk a financial hit by investing in firms with strong ESG principles.” Thus, once again proving the age-old political maxim that all politics is local. After all, what could be more local than your wallet?
In the runup to an election year, based on these poll numbers it is likely Republicans see an opening to shape public opinion — and put themselves on the right side of it.
Hence, ESG Month.
How HFSC Leaders Plan to Rein in Corporate ESG Efforts
As Yahoo! Finance reported, Rep. Barr recently articulated the purpose of ESG Month. It is to “get the ball rolling on deep reforms to a system they say is self-contradictory and counterproductive.”
And what reforms are on the table?
The HFSC has four hearings on ESG issues planned for this week, the first of which is happening today. While GOP committee leaders have some specific legislative goals for these proceedings, they also will use the hearings to try to convince the public that private sector ESG efforts are harming them. On Friday, for example, the HFSC will examine “how mandates like ESG distort markets and drive up costs for insurance and housing.”
More specifically, Rep. Barr has written a bill with Rep. Rick Allen (R-Ga.), the Ensuring Sound Guidance Act, that would redefine the ESG acronym and write into law a requirement that money managers prioritize financial returns above ESG in their investment decisions. The bill also would weaken the controversial U.S. Department of Labor regulation that has allowed fiduciaries to consider ESG factors in investment decisions.
Additionally, as The Washington Examiner explained, “a major focus of this week’s hearings is on the proxy voting process and proxy advisers.” Proxy voting allows shareholders to vote on key issues even if they do not attend a corporation’s annual shareholder meetings. As The Examiner also noted, “Republicans have accused large asset managers, who vote proxies on behalf of their clients, of using the power to leverage ESG goals.” GOP lawmakers say they want to reform the proxy voting system to safeguard the interests of retail investors and promote transparency, accountability, and accuracy in the proxy advisory system.
Republicans also plan to use the hearings to undermine the U.S. Securities and Exchange Commission’s (SEC) controversial climate disclosure rule, which would impose requirements regarding what public companies must report about how their operations affect the climate.
There are other priorities as well. Late last month, Rep. Huizenga and the HFSC’s ESG Working Group released a preliminary report that outlined its own ideas for reform. These include efforts to:
Enhance accountability in shareholder voting by aligning voting decisions with the economic interests of shareholders;
Increase transparency and oversight of large asset managers to ensure their practices reflect the pecuniary interest of retail investors;
Improve ESG rating agency accountability and transparency to safeguard retail shareholders;
Strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy;
Demand transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies; and
Protect U.S. companies from burdensome European Union regulations, safeguarding U.S. interests in global markets.
With Democrats in control of the Senate and President Joe Biden wielding the veto pen, even if these reforms were to win the approval of a majority of House lawmakers, they have no chance of becoming law – at least not until 2025, depending on the outcome of the 2024 elections.
That does not mean Republicans’ efforts are all for naught, however.
GOP Opposition Already Having an Impact
According to Yahoo! Finance, the GOP’s ESG Month comes as major companies and investors are already making moves to walk away from their ESG efforts. “After years of highlighting the principles in his annual notes, BlackRock (BLK) CEO Larry Fink now refuses to use the term at all,” Yahoo! Finance reported, while “another major money manager, Vanguard, recently withdrew from a climate-focused consortium called the Net Zero Asset Managers initiative.”
The New York Post recently noted BlackRock “is not alone.” The newspaper reported that survey data from RBC Capital Markets finds that 56% of sustainable-fund debuts have re-labeled their products “thematic” rather than “ESG.”
That’s not all. A CNBC poll fielded last year found only 25 percent of chief financial officers at public companies support the SEC’s climate disclosure rule. At the same time, these C-suite executives were “more likely than not to say they support the moves by Texas and Florida to ban pension funds from investing based on ESG factors.” Last October, Fortune noted smaller firms are “pulling back” on ESG decision-making frameworks.
Republicans understand their disapproval may be having an effect, which means they are unlikely to let up on this issue going into an election year. HFSC Chairman Patrick McHenry (R-N.C.) told Politico this week, “My members are intent on sending a message that you can’t kowtow to a far-left agenda and still have Republicans fighting the good fight on behalf of free markets and a marketplace that would benefit these companies. This is a complicated factor for sure. I have a variety of members that are deeply engaged in the subject matter, and you’ll hear a lot more from them, that’s for sure.”