Biden administration pushes back

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.

Biden administration pushes back

On June 5, the Biden Administration sought the dismissal of a lawsuit brought against it by states challenging a Department of Labor rule on the use of ESG in retirement funds governed by ERISA. The states filed suit earlier this year, arguing that the new rule would put the retirement savings of millions of Americans at unnecessary and politically tinged risk:

The Biden administration has asked a federal judge to toss out a lawsuit by Republican-led states seeking to strike down a rule allowing socially-conscious investing by employee retirement plans.

The U.S. Department of Justice in a filing in Amarillo, Texas federal court on Friday said the rule was needed to replace improper limitations that the Trump administration had placed on considering environmental, social and corporate governance (ESG) factors in making investment decisions.

A coalition of 25 states led by Utah and Texas sued in January, claiming the U.S. Department of Labor rule would imperil the retirement savings of millions of Americans by allowing investments to be made based on political agendas rather than financial considerations.

The states moved last month for a ruling permanently blocking the rule, which took effect Jan. 30.

The Biden administration on Friday said the rule makes clear that retirement plans must base decisions primarily on financial factors. But unlike the Trump-era rule, it also recognizes that issues such as climate change and social justice can impact companies’ long-term financial health, the Justice Department said….

The new rule covers plans that collectively invest $12 trillion on behalf of 150 million Americans.

Congress voted in March to repeal the rule but Democratic President Joe Biden vetoed the proposal.

The case has been assigned to U.S. District Judge Matthew Kacsmaryk, a conservative appointee of former Republican President Donald Trump….

House Republicans hold ESG hearing

On June 6, the House Oversight Committee held a hearing on ESG and the risks that its Republican led members believes it poses to the nation’s financial infrastructure:

A Republican congressional committee escalated its campaign against sustainable investing on Tuesday.

The GOP heads of two major House subcommittees sought to cast investing that considers factors like climate or human rights as an insidious attempt to “rewire the fabric of America,” in the words of Rep. Pat Fallon (R-Texas), chairman of the Oversight Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs.

Proponents of Environmental, Social and Governance (ESG) investing offer only “woke” policies that deliver nothing but higher prices, fewer market choices, and cultural oppression” and jeopardize investment returns for retirees and other investors, Fallon said in a statement.

Without control of the Senate, formal Republican anti-ESG initiatives are unlikely to pass — especially with President Biden lkely to veto them. And Democrats argued that the hearing was old news.

“Once again, we sit here in this hearing room, wasting our time, our constituents’ time and the nation’s time on a Republican manufactured crisis,” said Rep. Shontel Brown (D-Ohio)

Rep. Katie Porter (D-Calif.) was even more blunt. “I can’t believe this is part two [of the ESG hearings],” she said. “Part one was actually the stupidest hearing I’ve ever been to. And now we’re having part two.”

“Please God,” she added, “let there not be a part three.”…

Republicans were at pains to argue that this was not — as Democrats claimed — an attack on economic freedom, long a core rhetorical touchstone of the party.

“Republicans aren’t demonizing ESG — it’s a free country. If you want to invest in ESG, invest in ESG,” said Rep. Lisa McClain (R-Mich.), chair of the Subcommittee on Health Care and Financial Services.

But McClain and other GOP members argued that money managers should not make those decisions with the funds that have been entrusted for them….

Democrats have argued that without mandatory ESG disclosure, it is impossible for investors to make the sort of decisions that Republicans insist they should still be allowed to make.

In the states

NYC Comptroller decries politicization of ESG

In an interview last week, New York City Comptroller Brad Lander, described as “a custodian of, and financial adviser to, five pension systems,” argued against the politicization of ESG. Lander has also argued that the city’s pension funds divest from fossil fuel stocks and that ESG should guide investment decisions for the largest municipal pension funds in the nation:

Politicized rhetoric against ESG is making it harder for investment managers to consider the financial risks posed by climate change, says the overseer of the nation’s biggest municipal pension fund.

“I wish I could start from square one, when the field hadn’t already been polarized,” Brad Lander (D), comptroller of New York City, said in an interview. “I wish you could start from a place of saying, ‘Let me talk to you about what the pension obligations are that run out for decades.’”

Lander serves as a custodian of, and financial adviser to, five pension systems that are worth $248 billion and cover some 750,000 public sector workers. Three of those funds—representing teachers, transit workers, and a wide range of other city employees—have committed to achieving net zero emissions in their portfolios by 2040.

He has faced resistance from Republican elected officials over his investment strategy, as well as a lawsuit from public employees against the retirement fund.

Some of the hostility Lander has encountered in promoting ESG concepts arises from a misunderstanding of what the New York City’s comptroller’s office does and doesn’t do, he said….

Lander also said his identity as a progressive Democrat doesn’t influence the “very specific set of duties and responsibilities” he now must fulfill. Lander was the founding co-chair of New York City Council’s Progressive Caucus when he served as a councilmember in former Mayor Bill de Blasio’s old district….

Not everyone agrees with Lander’s position.

Four current and former city employees recently sued the three city pension funds that support ESG, alleging they breached their fiduciary duty by shedding $4 billion in fossil fuel investments.

“In America, you can always invest your own funds based on your personal or political preference so long as it’s done legally,” Utah Attorney General Sean Reyes said in an interview. “But when you invest other people’s assets as a fiduciary—particularly when those beneficiaries are public employees who are captive to your decisions—you are held to a much higher standard.”

Making investment decisions based on ESG factors, “as it appears Lander is doing, contradicts the duties of public pension trustees if those decisions are motivated by broad social, environmental, or governance concerns, rather than the exclusive financial interests of participants and beneficiaries,” Reyes said.

Similarly, Rep. James Comer (R-Ky.), chair of the House Oversight and Accountability Committee, during a May hearing called ESG investing “window dressing for liberal activism and radical far-left ideology.”

Lander said that kind of rhetoric hasn’t softened his stance on ESG, and he will continue to press the two city pension funds that haven’t adopted a net-zero implementation plan to do so. Those funds represent police officers and firefighters.

Broadly, the implementation plans lay out a strategy for emissions disclosures, interim targets, stronger partnerships with other investors, investments in climate change solutions such as renewable energy, and ultimately divestment.

But Lander also said he’s concerned about “a moderating or slowing impact” the pushback is having on some of the pension funds’ investment managers.

“Many of those folks don’t want to be in the eye of a political storm,” Lander said. “So even if they know they should have the freedom to invest, even if they know that it’s critical to decarbonize their portfolios, they’re slow-walking or stepping back from those obligations because of the political attacks.”…

Most of the academic literature shows that ESG funds underperform non-ESG funds, according to Samuel Hartzmark, an economics professor at Boston College’s Carroll School of Management.

“If you’re making investments in ways not to optimize total returns, it would be very difficult that that could lead to higher returns,” Hartzmark said.

The data is often noisy, and ESG investing is still too new for definitive conclusions to be reached, according to Hartzmark. But the findings of underperformance make intuitive sense if only because non-ESG funds have a wider pool of investments from which to choose, he said.

On Wall Street and in the private sector

ESG proposals flounder in 2023 annual meeting season

Last week, Bloomberg published the results of a tally kept on shareholder proposal votes this year by the ESG-focused group Sustainable Investments Institute. The results were not what supporters of ESG were hoping for:

Investor support for environmental and social shareholder proposals slumped to the lowest in six years amid the Republican backlash against sustainable investing.

Average backing for resolutions focused on climate change, workers’ rights, diversity and corporate governance declined this year to about 22% at annual shareholder meetings, down from a peak of 33% in 2021, according to a tally of votes compiled by the Sustainable Investments Institute through Thursday. Support hasn’t been this low since 2017.

“That’s just striking,” said Heidi Welsh, who runs Sustainable Investments and has been monitoring shareholder votes for more than three decades. Republican opposition to ESG initiatives has become a “wrecking ball,” she said. “It’s across the board that support has dropped.”

Corporate annual meetings have become the latest front in the GOP-led movement against environmental, social and governance investing, with more and more asset managers avoiding topics like climate change, gender and racial diversity. Shareholders also have become more cautious about how they vote amid concerns they’ll be blacklisted by Republican officials from doing business in their states. Pressure has been growing since March when asset managers were warned by a group of state attorneys general that Americans’ savings shouldn’t be used to “push political goals.”

The biggest opposition has focused on environmental initiatives, followed by human capital management and human rights, the Sustainable Investments analysis shows. Issues related to questions about political activity and health care, such as Covid drug pricing and access, had smaller declines. The number of ESG proposals that went to a vote fell to 240 from a peak of 283 last year.

In the spotlight

Bloomberg highlights an ESG opponent

Last week, Bloomberg highlighted the work of Consumers’ Research, a nonprofit consumer protection organization that, in the last few years, has campaigned against the use of ESG in investments, in the runup to the launch of the organization’s new campaign against Bank of America and its ESG-friendly CEO, Brian Moynihan:

Operating with a meager budget from a suburban home outside Washington, Will Hild is gearing up for his next battle against Wall Street and the forces behind ESG investing.

Hild and his tiny staff at Consumers’ Research are at the forefront of the movement, crafting adversarial campaigns that attack money managers who try to combine profits with altruistic goals by using environmental, social and governance metrics to help decide where to invest. The 37-year-old Hild, backed by powerful right-wing operative Leonard Leo, is part of a network of conservatives committed to defeating ESG, many of them opposed to efforts to mitigate climate change. 

He works behind the scenes crisscrossing the nation to lobby Republican state officials to take up the cause, but Hild is equally comfortable being out front—sending bombastic text messages about the evils of “woke” corporations or making media appearances touting ESG as a threat to America. 

Most notably, Hild has zeroed in on BlackRock Inc. and its Chief Executive Officer Larry Fink. Operating with an annual budget last year equivalent to 0.002% of BlackRock’s income, he helped catapult ESG from a niche investment strategy mostly popular in Europe to a topic that’s at home on right-wing AM radio talk shows. His efforts contributed to efforts by politicians in Florida, Texas and elsewhere to try to ban the company from doing business with their states.

Now, he’s got another target in his sights: Bank of America Corp.

Hild says he’s singling out the second-largest US bank and CEO Brian Moynihan for being the most vocal among Wall Street lenders when it comes to climate risks and other topics tied to ESG, including gun rights and abortion. He cites the bank’s work calculating greenhouse gas emissions for its clients and its internal diversity, equity and inclusion training as particularly egregious behavior.

“This isn’t going to be a one-off hit,” Hild said in a video interview. Consumers’ Research plans to run ads on cable news networks pressing the issue, and drive mobile billboards around Bank of America’s headquarters in Charlotte, North Carolina, its offices in midtown Manhattan and some of its busiest branches in states from Arizona to Florida.