Financial Services Committee to hold four ESG hearings this week

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.

Financial Services Committee to hold four ESG hearings this week

The U.S. House has returned from its Independence Day break with an ESG-heavy schedule, including four hearings this week in the House Financial Services Committee:

It’ll be a hectic week for financial services policy as well. Republicans led by House Financial Services Committee Chair Patrick McHenry (R-N.C.) are scheduled to host four hearings in three days all about three letters — ESG, the corporate shorthand for environmental, social and governance standards.

Complaining about ESG in the financial sector is one of House Republicans favorite activities these days. The full panel meets on Wednesday to examine “environmental and social policy in financial regulation.” A subsequent trio of subcommittee hearings will then take aim at ESG policy in housing, insurance and the proxy shareholder voting process.

According to the committee’s website, the schedule will be as follows:

Hearing Entitled: Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation
July 12, 2023 10:00 AM in 2128 RHOB

Hearing Entitled: Reforming the Proxy Process to Safeguard Investor Interests
July 13, 2023 10:00 AM in 2128 RHOB

Hearing Entitled: Oversight of the Proxy Advisory Industry
July 13, 2023 2:00 PM in 2128 RHOB

Hearing Entitled: How Mandates Like ESG Distort Markets and Drive Up Costs for Insurance and Housing
July 14, 2023 9:00 AM in 2128 RHOB

Congressmen send letters requesting ESG information from Big Three asset managers

House Judiciary Committee Chairman Jim Jordan (R-Ohio), along with Reps. Thomas Massie (R-Ky.) and Dan Bishop (R-N.C.), sent letters to the Big Three passive asset management firms – BlackRock, State Street, and Vanguard – on July 6 requesting information about their efforts to combat climate change through ESG. Jordan said such efforts could violate antitrust laws:

House Judiciary Chairman Jim Jordan and two other House Republicans fired off letters to financial industry giants including BlackRock Inc., Vanguard Group Inc., and State Street, contending that their efforts to combat climate change could violate US antitrust law.

The lawmakers warned in the letters on Thursday that agreements to decarbonize their assets “and reduce emissions to zero” could have “potentially harmful effects on Americans’ freedom and economic well-being.”

Jordan, Representative Thomas Massie of Kentucky and Representative Dan Bishop of North Carolina signed the letters, which ask for “relevant documents and information” to be produced within two weeks. …

The letters highlight the widening schism between much of the modern GOP and Wall Street, long a traditional ally.

The Republican lawmakers also sought information from the Glasgow Financial Alliance for Net Zero and its Net Zero Asset Managers initiative. GFANZ is co-chaired by former Bank of England Governor Mark Carney and Michael R. Bloomberg, the founder of Bloomberg News parent Bloomberg LP.

BlackRock said in a statement that its “sole focus as a fiduciary is seeking the best financial outcomes for our clients, consistent with their investment objectives. We look forward to engaging with the committee on how we do that.”

Vanguard spokesperson Emily Farrell said the company looks forward to “reviewing and responding” to the committee’s request. 

“As an asset manager owned by the investors in our funds, our unique, independent approach is focused on helping everyday retail investors achieve their long-term financial goals,” Farrell said in a Friday statement. 

Randall Jensen, spokesman at State Street, said the firm assesses and votes on shareholder proposals based on what’s in clients’ best long-term interests.

In the states

Morningstar removes reduced ESG scores for Israeli companies following pressure from state attorneys general

Several state attorneys general last August—led by Missouri’s Eric Schmitt (R)—launched an investigation into why Morningstar Inc.’s ESG rating service (Sustainalytics) appeared, in their view, to bias ESG scores against Israeli investments. The AGs claimed such activity would violate state laws forbidding discrimination against Israel. As Bloomberg noted at the time:

Missouri Attorney General Eric Schmitt launched an investigation into Morningstar Inc. and its subsidiary Sustainalytics Inc. over the firm’s evaluation of environmental, social and governance (ESG) issues.

The investigation aims to determine if the investment information and services company violated a consumer-protection law or a separate law intended to prevent the state making contracts with companies that boycott goods or services from Israel.

“Following public reports into Morningstar’s alleged anti-Israel bias and concerns raised to my Office, we are launching an investigation into Morningstar Inc. and Sustainalytics over potential consumer fraud issues,” said Schmitt in an emailed statement. “Missouri has been a leader in pushing back against woke ESG investing, and my Office will continue to look out for consumers.”

Morningstar announced on July 7 that it had taken steps to remove anti-Israel bias from its ESG ratings and that it would continue this process going forward:

Morningstar, Inc., a Chicago-based investment firm managing over $250 billion in assets, has removed 109 negative “controversy ratings” that its Sustainalytics subsidiary had given companies operating in Israel as part of its effort to promote investment guided by environmental, social, governmental (ESG) principles.

“After months of negotiations and discussions with Morningstar about its assumptions, sources, and language, we appreciate that a significant number of companies unfairly rated for their work with Israel have had these black marks lifted,” Elana Broitman, senior vice president of Jewish Federations of North America, which pressured the firm to stop the practice, said in a statement shared with The Algemeiner on Friday.

Broitman added, “Our work is not yet done, however, and we look forward to further progress and Morningstar’s selection of experts to advise on these matters.”

The firm’s removal of the controversy ratings for the companies builds on policy changes it instituted last year after being accused of supporting the boycott, divestment, and sanctions (BDS) and placing Israeli companies and those linked to Israel on a “watchlist.” In 2021, JLens, a group that offers financial advice to Jewish investors and was incorporated by the Anti-Defamation League (ADL) last November, reviewed Sustainalytics’ practices and alleged that the firm had used “BDS blacklists” and described Israeli companies with “politicized anti-Israel language” in its reports.

On Wall Street and in the private sector

S&P 500 CEOs join Larry Fink in avoiding ESG mentions

BlackRock CEO Larry Fink argued two weeks ago that the term ESG had become politicized and that he would, as a result, stop using the term (although his firm did not change its investment strategy). A Yahoo Finance report on July 8 cited data from FactSet that suggested references to the term ESG appeared in the fewest S&P 500 conference calls since Q2 2020:

BlackRock’s Larry Fink isn’t the only CEO no longer using the now-controversial acronym ESG.

ESG — which stands for a focus on environmental, social, and corporate governance principles — was mentioned by just 74 S&P 500 companies on corporate conference calls held during the first-quarter earnings season, according to data gathered by FactSet.

That was the lowest count in nearly three years and down from a peak of 156 in the fourth quarter of 2021. Executives are now more likely to mention artificial intelligence (AI), which garnered 110 mentions in calls held from March 15 through June 9.

The ESG mentions could fall again when companies begin to release their second-quarter results in the coming weeks.

“Something drastic happened in the past year or so,” said Erick Mokaya, lead author of The Transcript, a newsletter devoted to trends in earnings calls. …

Mokaya pointed to one moment last September as a key turning point for how ESG is treated by the c-suite.

It was then that JPMorgan Chase (JPM ) CEO Jamie Dimon appeared before Congress and questioned much of the ESG orthodoxy, saying “we aren’t getting this one right.”

Dimon argued that a more nuanced approach to things like climate practices was needed.

“Since then, a lot more CEOs have gotten bolder” about questioning previous ESG strategies and downplaying the term, said Mokaya.

ESG funds experienced net outflows in Q2 2023

The second quarter of 2023 marked the fifth straight quarter of outflows from ESG funds in the United States. ESG funds experienced quarterly outflows in Europe as well, according to Reuters:

Equity funds with an environmental, social and governance (ESG) tilt suffered a large loss of investors in the three months to end-June, dragging the sector into a rare net outflow for a first half of the year, data showed.

Outflows were driven by economic and regulatory worries in Europe, analysts said, and by concerns connected to an anti-ESG backlash in the United States, where funds saw their fifth consecutive quarter of net outflows, according to Refinitiv data on the sustainable investment industry so far in 2023. …

ESG funds that invest in shares saw $15.4 billion of net outflows in the second quarter, outpacing first quarter net inflows after a particularly rough June and even as global stock markets rallied, the data showed. …

The half-yearly net outflow was only the third since at least 2013 and followed an even bigger loss in the second half of 2022.