Economy and Society, November 10, 2022: Congressional Republicans discuss ESG and SEC oversight plans

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

Congressional Republicans discuss plans to investigate ESG and expand SEC oversight if they win majorities

According to the Washington Post, congressional Republicans are planning to spend time in the next Congress investigating ESG and trying to inhibit other efforts to promote what they call woke capitalism if they gain majorities in either legislative chamber. Republican leadership has also expressed interest in expanding legislative oversight of the SEC and its planned climate disclosure regulations:  

“Less than a week before the midterm elections, Republican lawmakers on Capitol Hill are already gearing up to investigate what they see as “woke capitalism,” a reference to Wall Street firms that treat climate change as an economic risk.

Polls suggest the GOP will retake the House, and Republicans there are preparing to grill the chief executives of big financial firms as well as Gary Gensler, the Democratic chairman of the Securities and Exchange Commission, about their efforts to curb climate change. In the Senate, where polls show a toss-up battle for control of the chamber, key senators are pushing legislation to punish businesses that prioritize environmental, social and governance causes — known as ESG — rather than pure profits.

Rep. Garland “Andy” Barr (R-Ky.) said in an interview that ESG principles “will be one of the major focuses of oversight of a Republican majority” on the House Financial Services Committee, which oversees the nation’s banking, insurance and real estate sectors.

“My view is that ESG investing is a cancer within our capital markets,” Barr said. “It is a fraud on American investors.”

The SEC “is a target of our oversight because of this 534-page monstrosity of a climate disclosure regulation,” he added, referring to a proposed rule that would require all publicly traded companies to disclose their greenhouse gas emissions and the risks they face from climate change.

Not everyone is convinced that the Wall Street firms face a real threat from a Republican takeover of Congress. Some see the GOP moves as political theater intended to satisfy the party’s base and fuel the nation’s ongoing culture wars.

The GOP is engaged in “a lot of political hay making,” said Ivan Frishberg, chief sustainability officer at Amalgamated Bank, which does not do business with fossil fuel companies. “But I don’t think this is changing what asset managers or banks are doing in terms of their approach to either their stewardship of assets in a changing climate, or participation in the climate initiatives that they’re a part of.”

Yet supporters of sustainable investing are bracing for intense scrutiny if Democrats fare badly in the midterms, leading to high-profile hearings and grilling of administration officials.

Rep. Frank D. Lucas (R-Okla.) said he would prefer to seek the testimony of Gensler and other Biden administration officials before hauling in the chief executives of big financial firms such as BlackRock, the world’s largest asset manager. Lucas said he would recommend this approach to Rep. Patrick T. McHenry (R-N.C.), who would become chair of the Financial Services Committee if the chamber changes hands.

And Rep. Blaine Luetkemeyer (R-Mo.) said he hopes to call in the heads of the three big investment advisers — BlackRock, Vanguard and State Street — that have used their economic power to curb climate change and advance other causes that are popular among liberals….

Sen. Tom Cotton (R-Ark.) has accused BlackRock and other Wall Street firms of “acting like a climate cartel” and contributing to high gas prices. But there is no evidence that sustainable investing has affected gas prices, which have gone up for a variety of reasons, including tightening global oil markets and Russia’s invasion of Ukraine.

Larry Fink, the chief executive of BlackRock, has defended his firm’s push to hold companies accountable for environmental and social progress. In his annual letter to corporate America in January, he argued that focusing on ESG principles does not conflict with making money.

“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” Fink wrote in the letter, adding, “Capitalism has the power to shape society and act as a powerful catalyst for change. But businesses can’t do this alone, and they cannot be the climate police.””

New York Post business columnist Charles Gasparino confirms the Washington Post’s reporting, saying that his sources are telling him many of the same things about a potential GOP agenda on ESG. He also says Republicans have plans to try and prevent SEC Chairman Gary Gensler from becoming treasury secretary if Janet Yellen steps down from the position:

“Gary Gensler, a former Wall Street banker and academic, is the chair of the agency, appointed by Sleepy Joe nearly two years ago supposedly to protect investors from scammers.

Instead, Gensler is transforming the SEC in ways not even moderate Dems on Wall Street had ever imagined….

He and his Dem colleagues on the commission approved a cockamamie set of standards imposed by the Nasdaq stock market that is intended to make every listed company disclose and meet progressive board-diversity mandates. (Noticeably exempted: All those Chinese companies listed on the exchange as Nasdaq slipped in a loophole where they can skip appointing members of the country’s oppressed ethnic minorities.)

Now he wants to make the Nasdaq model de rigueur across corporate America. In documents to investors, Gensler wants public companies to make sweeping disclosures on how they are reducing their carbon footprint, on top of revealing the racial and ethnic makeup of their workforce….

Gensler is angling to be Treasury secretary when the current occupant, Janet Yellen steps down as expected next year.

A Republican congressional sweep ­negates the Gensler Treasury possibility, I am told. The Senate will hold hearings on what the GOP believes is his radical transformation of the agency….

In the Senate, plans are also in place to put so-called riders on must-pass spending bills to zero out Gensler’s ESG/diversity stuff. Biden will have a choice of either agreeing to the partial defunding of SEC activities and signing spending bills, or face a legislative stalemate.

Another set of hearings will target the corporate enablers of the Dems’ progressive economic agenda. Retiring Pennsylvania Republican Sen. Pat Toomey has been requesting information from companies involved in Environmental Social Governance investing, which is a big moneymaker on Wall Street but, he believes, anti-consumer and politically fraught.

Toomey and top Republicans believe this investment method has forced companies to adopt progressive positions on the environment and other contentious issues at the worst possible time. By late 2021, inflation and gas prices in particular were already spiking because of Biden’s anti-drilling energy agenda while pandemic lockdowns ended.

The subsequent war in Ukraine further eroded oil inventories and added more price pressure. Asset managers pushing ESG mandates made a bad situation exponentially worse by threatening to direct money away from energy producers that didn’t further cut back production.

Once in the majority, Republicans will have subpoena power over massive asset managers, and to compel Wall Street firms to turn over the information and defend their practices at public hearings — which I am told is the plan.”

On Wall Street and in the private sector

Agricultural companies and organizations push back against proposed SEC rule on emissions

Late last month, farmers and agricultural companies began to push back against the SEC’s proposed climate disclosure rule. Trade groups including the American Farm Bureau Federation and the National Corn Growers Association argue that, in their view, the imposition of greenhouse gas disclosure requirements could harm America’s farms and agricultural capacity. According to the Wall Street Journal:

“Big agricultural groups say a proposal from the Securities and Exchange Commission requiring companies to report their carbon footprint could drive small farmers out of business.

Skeptics say it is more likely to be a boon for the consulting business.

The proposal, unveiled by the SEC in March and not yet finalized, would require publicly traded companies to disclose their greenhouse-gas emissions, as well as the risks their business faces from climate change. Most controversially, some large companies would also have to provide an estimate of the emissions from their suppliers and consumers.

Agriculture companies and farm groups have said the burden of generating those estimates would get passed on to small private farmers and drive up food costs. Supporters say those claims are misleading, and that large public companies will likely rely on consultants to crunch the numbers.

The SEC proposal is backed by environmentalists and some fund managers who hope more transparency about climate data will help people make more informed investment decisions.

The agriculture industry’s pushback aligns it with some other sectors opposed to the SEC proposal, including auto manufacturers and oil producers. Other industries with a smaller carbon footprint and more liberal-leaning workforce, including the tech and financial industries, have been broadly supportive of the proposal….

Meanwhile, trade groups including American Farm Bureau Federation and the National Corn Growers Association are rallying their members against the rule. They say requiring companies to calculate such emissions is a daunting task given the nature of farming.

“A farm isn’t a smokestack,” said Mary-Thomas Hart, chief counsel at the National Cattlemen’s Beef Association. “You can’t put a monitor in and get steady emissions data.””

Notable quotes

ESG funds experience largest outflow since Q4 2000

In the October 28 edition of its EPFR (Emerging Portfolio Fund Research) Chartbook, Informa (a financial intelligence company) noted that ESG equity funds experienced their largest weekly outflow since EPFR started tracking their performance in 2000:

“Going into the final days of October, Equity Funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates posted their biggest weekly outflow since EPFR started tracking them in 4Q00.”