House Republicans ramp up ESG opposition

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.

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ESG Developments This Week

In Washington, D.C.

House Republicans ramp up ESG opposition

House Republicans are moving to push back against ESG with their majority in the chamber. The House Financial Services Committee on February 3 announced the formation of what Fox News called a first-of-its-kind ESG working group:

Republican leaders on the House Financial Services Committee are creating a first-of-its-kind task force to coordinate their response to various proposals related to the environmental, social and governance (ESG) movement.

Financial Services Committee Chairman Patrick McHenry, R-N.C., said Friday that the ESG working group would lead the Republican effort to combat the threat ESG policies pose to U.S. capital markets. He added that Financial Services Oversight Subcommittee Chairman Bill Huizenga, R-Mich., would lead the initiative and appointed another eight GOP committee members to serve on the working group.

“Progressives are trying to do with American businesses what they already did to our public education system—using our institutions to force their far-left ideology on the American people,” McHenry said in a statement shared with Fox News Digital. “Their latest tool in these efforts is environmental, social, and governance proposals. This is why I am creating a Republican ESG working group led by Oversight & Investigations Subcommittee Chair Bill Huizenga.” …

According to McHenry, the working group will be focused on reining in regulatory overreach from the Securities and Exchange Commission (SEC), reinforce the materiality standard — which requires corporations to disclose key information to investors — “as a pillar” of the financial disclosure regime and hold those who misuse the proxy process that gives shareholders a saying in company decisions accountable.

The task force will ultimately organize Republican efforts to fight back against the ESG movement, educate congressmen on the issues and develop policy proposals. …

In addition to Huizenga, fellow committee members Reps. Ann Wagner, R-Mo., Barry Loudermilk, R-Ga., Bryan Steil, R-Wis., Andrew Garbarino, R-N.Y., Byron Donalds, R-Fla., Monica De La Cruz, R-Texas, Erin Houchin, R-Ind., and Andy Ogles, R-Tenn., will serve on the working group.

SEC considers modification of proposed climate disclosure rules 

The Wall Street Journal on February 3 reported that Securities and Exchange Commission (SEC) Chairman Gary Gensler and his supporters on the commission might be considering reducing the amount of climate data publicly traded companies will have to disclose under its proposed climate rules:

The Securities and Exchange Commission is considering a softening of planned rules requiring companies to disclose the effects of extreme weather and other costs related to global warming when the regulator completes its climate-change proposals, people close to the agency said.

The Wall Street regulator is looking again at the financial reporting aspect of the climate-disclosure plan it issued last year, following pushback from investors, companies and lawmakers, the people said. 

The final version of the SEC rules, expected this year, will likely still mandate some climate disclosures in financial statements, according to the people close to the agency. But the commission is weighing making the requirements less onerous than originally proposed, the people said, such as by raising the threshold at which companies must report climate costs.

Gary Gensler‘s climate proposals would require publicly traded companies to disclose the greenhouse-gas emissions from their operations, energy consumption and—in some cases—suppliers and customers. 

The climate package, a signature measure of Mr. Gensler’s SEC leadership, is expected to face legal challenges from industry groups or Republicans. Dialing back the financial-reporting rules could bolster the agency’s legal defense by allowing it to demonstrate that it has listened to business concerns and reduced the forecast multibillion-dollar annual cost of the new system. Evan Williams, senior director at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said the SEC needs to adjust the proposal if it wants to produce “a court-durable final rule.”

The proposed reporting rules would require public companies to include a raft of climate data in their audited financial statements. The mandated disclosures cover everything from costs caused by wildfires to the loss of a sales contract because of climate regulations, such as a cap on carbon emissions.

Companies would have to analyze climate-related costs and risks for each line item of their financial statements, such as revenue, inventories or intangible assets. Any climate costs that are 1% or more of each line item total would have to be reported….

SEC officials have been taken aback by the strength of opposition to their financial- reporting proposals, people close to the agency said. Many companies said the changes would bring high costs, complexity and potential unintended consequences.

SEC commissioner shares ESG concerns

SEC Commissioner Mark Uyeda on January 27 gave a speech in which he addressed what he views as the failures of ESG. Some analysts have claimed that Uyeda’s remarks put forth a legislative and legal roadmap for ESG opponents to follow:

SEC Commissioner Uyeda delivered an address in which he “focus[ed] on issues related to asset managers’ use of environmental, social, and governance (ESG) investment strategies.”  While his talk addressed many aspects of ESG investing, including “[t]he [g]rowth of ESG [i]nvesting,” the thrust of his talk concerned “three factors” that “complicated” “ESG investing.”  Specifically, these factors were defined as:

(1) “[T]he inability to objectively define ‘ESG’ or any of its components.”

(2) “[T]he temptation . . . [for] regulators . . . [to] favor specific ESG goals or objectives.”

(3) “[T]he desire of certain asset managers to use client assets to pursue ESG-related goals without obtaining a mandate from clients.” …

[T]he overall thrust of Commissioner Uyeda’s argument is that the SEC’s proposed rulemaking with respect to ESG issues–the focus of substantial attention by both regulators and commentators over the past year–is unnecessary because “the federal securities laws already have standards in place” and that “full and fair disclosure” is already required by the relevant regulatory framework.

But Commissioner Uyeda’s speech is not simply a re-hashing of conservative complaints about ESG investing.  Instead, it serves as a road map for arguments–both legal and otherwise–likely to be advanced in the courtrooms and Congress against any further attempts to increase the salience of ESG factors.

In the states

Indiana lawmakers join ESG pushback

Members of the Indiana General Assembly’s House Financial Institutions Committee on February 2 passed a bill that would require the state to remove all pension funds from management by financial firms that support ESG or consider ESG criteria in investments:

A House committee on Thursday approved a bill requiring the state’s public pension system to divest from and terminate business relationships with firms or funds that use non-financial “ESG” factors in decisions, such boycotting gun manufacturers and fossil fuel companies.

The prohibition is part of a GOP effort to crack down on the environmental, social and governmental framework known as ESG investing.

“These types of policies undermine the security that we seek,” author Rep. Ethan Manning, R-Logansport, told the House Financial Institutions Committee on Thursday. “We need to focus our pension investments on financial factors and leave the politics and the social and ideological considerations out of it.”

Proponents say House Bill 1008 ensures that managers investing on behalf of the Indiana Public Retirement System make returns-based decisions, and supports businesses in controversial industries who’ve found themselves cut off from financing, insurance and shipping options. …

INPRS uses external money managers to make investment decisions for its $45 billion-plus portfolio. A team of more than 20 INPRS employees then manage those investment managers.

The legislation turns scrutiny on them.

It says portfolio company engagement, votes and other actions involving a range of topics could constitute furthering ESG interests. That includes disclosing, lowering or offsetting greenhouse gas emissions, looking at things like hiring practices and divesting from a list of protected industries.

Oklahoma treasurer inquires about financial companies’ ESG policies, eligibility for state contracts 

Oklahoma State Treasurer Todd Russ (R) sent a letter to more than 100 financial services companies to determine their positions on ESG and, by extension, their suitability for state contracts:

Republican State Treasurer Todd Russ of Oklahoma sent a letter to over 100 financial institutions to determine if their Environmental, Social and Governance (ESG) policies disqualify them from working with the Oklahoma government, Russ’ office announced Wednesday.

Companies will have until March 31 to respond to a series of 19 questions that the state of Oklahoma will use to determine if the company is violating Oklahoma law by engaging in a boycott of energy companies, according to the letter obtained by the Daily Caller News Foundation. Russ specifically mentioned BlackRock, the world’s largest asset manager and frequent target of GOP criticism for its consistent support of ESG investing, which Republican critics allege violates its fiduciary duty to its clients, in a statement to the DCNF.

“This list is crucial to provide accountability for our government entities, including organizations responsible for pension funds such as the Oklahoma Public Employees Retirement System (OPERS), Teachers Retirement System (TRS) to ensure our constituents’ tax dollars are only invested in secure and verified financial companies that comply with Oklahoma law,” Russ told the DCNF. “OPERS alone has more than 60 percent of their portfolio totaling more than $10 billion managed by Blackrock, a well-known adversary of energy businesses.”…

The debate around financial managers’ use of ESG policies has intensified in recent months, as several Republican states pulled billions from BlackRock. The company was also among those who received a letter from Democratic New York City Comptroller Brad Lander, who threatened to pull $43 billion from the firm, and more from others, if they failed to support shareholder resolutions that promoted “net zero” investment strategies. 

Proxy advisors push back against pushback

The two largest proxy advisory services – Institutional Shareholder Service (ISS) and Glass-Lewis – responded on January 31 to an inquiry into the services’ ESG policies launched last month by 21 state attorneys general. Both companies stood by their approaches to considering certain ESG factors in client voting recommendations:

Top U.S. proxy advisers Glass Lewis and Institutional Shareholder Services on Tuesday defended their corporate voting recommendations on environmental and social matters, with both saying they remain focused on long-term shareholder value.

The two companies were questioned by Republican attorneys general from 21 states earlier this month about whether their guidance on issues like climate change or boardroom diversity violate their duties to clients.

In a response letter dated Jan. 31, Glass Lewis Executive Chairman Kevin Cameron pushed back on the suggestion and said that under the firm’s benchmark policy it routinely recommends against shareholder proposals “that — however worthwhile as a social goal — have not demonstrated a nexus to shareholder value.”

In addition, Cameron wrote that issues like how companies manage the risks and opportunities presented by climate change “is widely recognized as a material risk-return factor today.” Nearly all companies in the S&P 500 now publish sustainability reports using various third-party standards, he noted. …

In a separate letter provided by a spokesman, ISS Chief Executive Gary Retelny wrote that while environmental, social and governance (ESG) considerations have grown more important to investors, “fulfilling our fiduciary and contractual responsibilities to our clients remains the foundation of our business.”