House Republican introduces bill opposing ESG in retirement funds

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.

House GOP working group issues ESG agenda

The Republican ESG House Working Group issued a memo on June 23 detailing its agenda for the 118th Congress (2023-24), which focuses on increasing oversight of proxy voting and large asset management firms:

House Republicans identified eight key areas of environmental, social and governance (ESG) policies it will focus on for the rest of the 118th Congress.

The priorities range from reforming the shareholder-voting process and increasing oversight of large asset managers, to more closely supervising the Securities and Exchange Commission as it develops climate-change disclosure rules.

The report, the first from a group of House lawmakers that make up the ESG Working Group, lays out ways President Joe Biden’s administration has used ESG in his tenure and how it will focus its efforts for the next year and a half.

The report identifies nearly a dozen ways to revamp the proxy-voting process, including shareholder-proposal submission and resubmission, and holding proxy-advisory firms accountable.

The memo also identifies ESG ratings agencies that the group says have had an outsize influence on investors.

The group is led by Rep. Bill Huizenga (R-Mich.) and eight other House Republican lawmakers. It was established by House Financial Services Committee Chair Patrick McHenry (R-N.C.) in February.

House Republican introduces bill opposing ESG in retirement funds

Congressman Andy Barr (R, Ky.) introduced a bill on June 21 opposing the Biden Labor Department’s rule allowing the use of ESG in retirement plan investments. Both chambers recently passed a Congressional Review Act (CRA) resolution overturning the Labor Department rule, but President Joe Biden (D) vetoed that legislation. Congressman Barr introduced the new bill in response:

House Republicans are continuing their attempt to pump the brakes on so-called “woke” investing with new legislation that could place limits on financial advisors and retirement funds.

Rep. Andy Barr, R-Ky., will introduce a bill Wednesday that would target funds that consider environmental, social and governance issues, known as ESG. Barr’s measure would update the Employee Retirement Income Security Act to require retirement funds to focus only on maximizing profits, limiting the ability to invest in ESG options.

Retail investors would also need to be notified if their financial advisors invested their funds in an ESG. In addition, advisors would need to disclose the difference in fees and performance between ESG funds and a similar index. Proponents say ESG investing is intended to promote the social good, although critics say it hurts investors.

“Environmental, social and governance investing has become a cancer and a fraud within our capital markets, steering retail investors, sometimes unwittingly, into lower-performing, less diversified and higher-fee funds,” Barr told CNBC …

Barr’s bill doesn’t specifically block funds from being invested in ESG options. Rather, his goal is to ensure investors’ returns are prioritized ahead of social and environmental goals. Those who want to invest in ESGs would be able to do so but they would need to provide consent in writing. …

While Barr’s broader ESG bill is unlikely to make it to Biden’s desk or even to the Senate, it could be a part of a larger effort Republicans on the House Financial Services Committee will make to highlight concerns around ESG investing in July. Barr, who’s a senior member of the committee, said several hearings are planned on the topic, as well as a package of bills.

In the states

North Carolina governor vetoes ESG bill

North Carolina Governor Roy Cooper (D) on June 23 vetoed the anti-ESG bill sent to him by the state legislature. Cooper’s veto was expected, but the state legislature is expected to overturn the veto:

North Carolina Gov. Roy Cooper vetoed on Friday the General Assembly’s annual farm measure and another bill that would prevent state government activities like pension investing from being directed based on environmental or social justice concerns.

The vetoes bring the Democratic governor’s total for the year to eight. Next, the two latest likely will be subjected to override votes by Republicans, who now hold veto-proof majorities in the House and Senate. Both measures also received some votes from Democrats on the way to reaching Cooper’s desk earlier this month. …

The other vetoed bill would ban state agencies from using “environmental, social and governance” standards to screen potential investments, award contracts, or hire and fire employees. It also says the state could not weigh how a company promotes sustainability, engages with its community, or structures its leadership to support those goals.

The measure stems from Republican efforts nationwide to counterweight a focus by big business on environmental sustainability and workplace diversity that they say is so extreme that it harms shareholders and pensioners.

At least two other states have already enacted laws banning such criteria, and elected officials in several other red states have derided them or proposed similar policies to stop investors who contract with states from adopting them.

And on state investments like those in pension funds, the bill says the state treasurer could solely consider factors expected to have a material effect on the financial risk or financial return of an investment.

On Wall Street and in the private sector

Larry Fink says he will not use the term ESG

BlackRock CEO Larry Fink spoke at the Aspen Ideas Summit last weekend and said he has stopped using the term ESG because, in his view, it has become associated with political connotations. Fink also said that Florida’s decision to quit doing business with BlackRock hurt his firm:

BlackRock CEO Larry Fink said he’s no longer using the term “ESG” (environment, social and governance) because it is being politically “weaponized” and he’s “ashamed” to be part of the debate on the issue.

Why it matters: How the world’s largest asset manager frames its investment approach is a leading indicator for the market. BlackRock manages $9.2 trillion.

What we’re watching: Fink’s latest statement is sure to generate plenty of controversy.

The backstory: BlackRock’s bullish outlook on responsible environmental, social and governance investing is being blasted by conservatives as “woke capitalism” and has drawn boycotts from Florida and Texas.

 Fink has been a major proponent of factoring in climate change risks to investing strategies and corporate leadership.

What’s new: In a conversation at the Aspen Ideas Festival on Sunday, Fink acknowledged that Florida Gov. Ron DeSantis’ decision to pull $2 billion in assets hurt his firm in 2022, but made clear last year was his company’s best with net flows of $200 billion from U.S. clients.

What he’s saying: “I’m ashamed of being part of this conversation,” Fink said.

 “When I write these [investment] letters, it was never meant to be a political statement. … They were written to identify longterm issues to our longterm investors,” he told the crowd.

Yes, but: When pressed on the statement later in the conversation, Fink backtracked.

“I never said I was ashamed,” he said, incorrectly. “I’m not ashamed. I do believe in conscientious capitalism.”

 “I’m not going to use the word ESG because it’s been misused by the far left and the far right,” he added.

In the spotlight

What’s next after ESG?

In an essay for RealClear Markets, Richard Morrison, a senior fellow at The Competitive Enterprise Institute, explains why the business press has suggested the term ESG is being abandoned and what he thinks is coming next in the social investment space:

Buzz in the business press suggests the ESG craze is over or even that ESG is dead. Not quite. The movement’s frameworks, guidelines, and regulations are not about to vanish. Yet the initial phase of fast growth and rapid adoption has played through, evidenced by the fact virtually every big company has adopted ESG metrics and reporting, and most of the largest financial firms have signed on to public ESG commitments. What comes after should include firms delivering greater clarity and specificity and governmental regulators allowing market actors to determine which corporate initiatives are producing value.

ESG advocates have been spectacularly successful at signing up corporations to international partnerships like the United Nations’ Principles for Responsible Investment and the Glasgow Financial Alliance for Net Zero. Having achieved such a prominent position, however, comes with the burden of actually implementing the movement’s lofty goals.

The aura of the early insurgent era, during which ESG activists thought themselves scrappy underdogs storming the old boys club of corporate finance, is difficult to maintain once most of the largest financial firms in the world have signed public pledges endorsing your position. Indeed, it would be difficult today to find a major corporation that lacks a detailed report extolling its impressive ESG score.

Lest you think I’m joking, fossil fuel giant Halliburton was once so controversial its name was said to be “synonymous with the word ‘evil’.” Last year, it was named to the Investor’s Business Daily Top 100 Best ESG Companies list. This sort of thing has led to confusion among regular people about what ESG investing is supposed to accomplish. …

Many states have passed anti-ESG legislation to protect local industries and the jobs they support. Other states have changed the way they manage state pension funds to stop environmental and social activist campaigners from dictating investment strategies.

On the other side of the debate, the Biden administration recently reversed a sensible Trump-era rule that would have required fiduciaries of private pension funds to focus solely on financial return for beneficiaries. Critics of the original rule complained that those restrictions would keep them from addressing vital social goals. However, as then-Secretary of Labor Eugene Scalia wrote in 2020, for fund managers, “one ‘social’ goal trumps all others—retirement security for American workers.” Half of the nation’s state attorneys general are challenging the Biden reversal. …

There is no one best way to manage a corporation or invest in general. Unfortunately activist groups and government agencies have so far failed to understand that.