Financial Services Committee holds four hearings targeting ESG policies

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 holds four hearings targeting ESG policies

The House Republican majority held four ESG hearings last week, which included a full House Financial Services Committee hearing on July 12, followed by three subcommittee hearings. As expected, there was debate:

Democrats and Republicans attacked each other as opponents of free markets in a contentious hearing Wednesday concerning proposals that would require companies to disclose climate-related information.

The hearing marked the beginning of a series that will be held by the GOP-controlled House Financial Services Committee taking aim at environmental, social and governance (ESG) investing. …

The target of Wednesday’s hearing was the federal government — specifically, financial regulations proposed by the Biden administration that seek to facilitate ESG investors by requiring companies to disclose information related to a company’s impacts on climate change, as well as the risks it faces from extreme weather.

While none of these bills are likely to make it through a Democratic-controlled Senate, the hearings served to advertise the GOP’s priorities should it retake control of the upper chamber — or the presidency.

The Hill continued, listing “five things to know about the [current state of the] fight over ESG”:

Both sides attacked each other as “anti-capitalist” …

Republicans focused their attacks on the federal government …

The fight hinges on an argument about costs …

Republicans contend ESG would do little to help the climate …

The anti-ESG campaign is having an effect — though not on federal legislation

The Committee’s Subcommittee on Capital Markets then held two hearings on July 13—one on the proxy process, and the other focusing specifically on proxy advisory services. At the first hearing, Republicans unveiled their plans to change how shareholder meetings work:

House Republicans unveiled a push last week aimed at changing how shareholder meetings work as part of their larger campaign against socially-conscious investing. …

Some ideas would make it easier for corporate leadership to quickly dispatch shareholder proposals without a vote. Others would place limits on the role of the Securities and Exchange Commission (SEC). The proxy voting process — which conservatives say introduces too many “non-material” topics — is also an area of intense interest. …

The shareholder proposal process is typically a non-binding affair — CEOs and boards are usually free to ignore them if they wish — but they can exert pressure on companies to change behaviors. Corporate directors often feel the pressure most acutely, as the same group of shareholders putting forward these proposals also vote on their appointment or removal from office. …

The campaign in Washington comes in response to a surge in shareholder activism in the pro- and anti- ESG directions.

An analysis by ISS Corporate Solutions found a record number of shareholder proposals through the first five months of 2023 with just 8.3% being approved so far.

A big factor in the surge is a rise of anti-ESG efforts. ISS found this type of proposal has grown by more than 400% since 2020 and a recent Harvard University analysis found that concerns there were decidedly focused on diversity matters with two-thirds of the proposals in 2023. Only about 10% concerned the environment.

The rising shareholder activism has come in part following a change in the rules after Joe Biden took office. During the Trump administration, then-SEC Chair Jay Clayton often discouraged proposals with an agency that was empowered to take actions like so-called “no action letters” to short-circuit some shareholder proposals.

Many of those rules were reversed in 2021 when Gary Gensler took office as chair of the SEC. In recent years, the agency has instead actively prodded corporate directors and shareholders to more forcefully consider issues like the climate.

Many of the latest bills introduced would re-implement some Trump-era rules but with the additional force of law.

Later the same day, when the discussion turned to proxy advisory services, disagreements were once again ignited:

The hearing zeroed in on the influence of proxy advisors on shareholder voting decisions on questions related to ESG investing. Republicans pushed back against what they called the prioritization of ESG shareholder resolutions, while Democrats say shareholders deserve to be informed of all possible risks to their investments.

“Unfortunately, unrestricted shareholder activism is diverting attention and limited resources from core issues, undermining the attractiveness of U.S. markets and discouraging companies from going public,” Rep. Ann Wagner, R-Mo., chair of the Subcommittee on Capital Markets, said during opening remarks. …

Wagner said the proxy process should be reformed to ensure shareholder proposals align with company interests. She also denounced the Securities and Exchange Commission’s 2022 proposal to require public companies to make more disclosures related to environmental, social and governance factors, reiterating criticism made during a full committee hearing Wednesday. …

Democrats, led by Rep. Maxine Waters, ranking member of the Financial Services Committee, are countering Republicans’ monthlong assault on ESG regulations.

“Today, Republicans are giving the term ‘investor protection’ new meaning by pushing legislation that would protect investors from their own ideas,” Waters said during the hearing. “For a party that supposedly values free speech and free market capitalism, they are now trying to muzzle the ability of shareholders to bring forth proposals that can influence the direction of the companies they own.”

The discussion continued on July 14, this time at the Committee’s Subcommittee on Housing and Insurance:

House Republicans continued their string of hearings on ESG regulations Friday, the latest in what Republicans are calling “ESG month” on Capitol Hill.

Friday’s testimony focused on the impacts of ESG – environmental, social and corporate governance – policies have on housing and insurance costs.

The rush to implement ESG policies in housing and insurance will come at a price, leaving taxpayers and our constituents with fewer choices and higher costs,” said Rep. Bill Huizenga, R-Mich.

Democrats argue these policies have the opposite impact.

Communities that regularly adopt modern energy codes also save money for residents and businesses in improved community health and resilience,” argued Rep. Emanuel Cleaver, D-Mo. …

The GOP, however, zeroed in on new residential energy efficiency regulations by the Department of Energy.

Bill Boor, the CEO of Cavco – a manufactured homes builder – claimed these new rules drive up the price of their homes by $6,000 in his testimony.

The question is not just one of whether there is a return on the added upfront costs, but whether the prospective homeowner can even afford the cost at all,” he said.

According to Boor, the increase prices an estimated 900,000 households out of home-ownership.

Senate bill introduced to limit ESG in public retirement plans

Senator Tom Cotton (R-Ark.) introduced a bill on July 12 to limit the use of ESG in retirement and public pension plans:

An Arkansas senator introduced a bill Wednesday aimed at preventing hedge fund managers from considering a progressive-back set of criteria referred to as ESG when managing client funds.

Republican Sen. Tom Cotton’s Ensuring Sound Guidance Act would require investment managers and retirement plan sponsors to consider the maximum return and minimum risk without considering non-financial factors such as a company’s use of fossil fuel. …

The bill would update national investment law to require the Comptroller General of the United States to investigate state and local pension plans to determine if they are impacted by ESG policies.

The Arkansas legislature passed in its most recent session an ESG-focused bill to make sure Arkansas does not invest funds, such as its retirement funds, with financial service providers that discriminate against the energy, fossil fuel, ammunition and firearms industries.

In the states

State AGs warn corporations that social policies could violate the law following Supreme Court affirmative action ruling 

Thirteen Republican state attorneys general sent a letter on July 13 to major corporations warning that certain social policies (the S in ESG) like making hiring or promotion decisions based on race might be illegal following the Supreme Court’s recent ruling on affirmative action:

More than a dozen Republican attorneys general sent a letter to major corporations Thursday warning them to refrain from using racial preferences in hiring and promotion decisions.

Pointing to the Supreme Court’s decision undercutting the use of affirmative action in college admissions, the group said that companies would expose themselves to “serious legal consequences” for discriminating against different groups “even for benign purposes.”

“The Supreme Court’s recent decision should place every employer and contractor on notice of the illegality of racial quotas and race-based preferences in employment and contracting practices,” the letter from 13 attorneys general states.

Though the high court’s ruling in the college admissions cases did not directly implicate so-called diversity, equity or inclusion policies that have seen widespread adoption among the country’s largest employers, many legal experts believe workplace diversity efforts will see additional challenges that they unlawfully boost some groups over others.

The letter, which was directed at Fortune 100 companies and other large businesses, alleges that racial discrimination is “all too common” and violates federal and state civil rights laws.

“Responsible corporations interested in supporting underprivileged individuals and communities can find many lawful outlets to do so,” wrote the group, led by the attorneys general of Kansas and Tennessee. “But drawing crude lines based on skin color is not a lawful outlet, and it hurts more than it helps.”

Conservatives have stepped up their attacks on businesses over what they perceive as “woke” policies, namely around diversity initiatives and ESG-related efforts.