House GOP passes four more bills opposing ESG out of committee

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 passes four more bills opposing ESG out of committee

House Republicans on September 14 passed four new ESG bills out of the Education and Workforce Committee, bringing the total number of ESG bills passed out of committee this year to seven. The move followed the lead of the House Financial Services Committee, which advanced its own slate of bills opposing ESG in August:

Republicans signaled that removing environmental, social and governance considerations from financial decision-making will remain a hot-button issue for them in 2024 political campaigns by advancing another package of bills that observers say is more about messaging than substance.

The Education and Workforce Committee passed four measures Thursday along party lines that together would generally attempt to restrict—but not prohibit—investment advisers and financial institutions from considering ESG factors in retirement-investment advice. …

Authors of the latest measures say they’re trying to rein in ESG policies that are overly burdensome for businesses. Three of the four measures would tweak the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406) to return to Trump-era policies at the Department of Labor.

“Advancing a radical political agenda at the expense of retirement savers is wrong,” said committee chair Rep. Virginia Foxx (R-N.C.), in a statement to Bloomberg Law. “These bills seek to ensure financial institutions are focused on maximizing returns in retirement plans rather than on woke ESG factors.” …

The anti-ESG bills approved by the Education and Workforce Committee don’t outright ban retirement-wealth advisers from recommending ESG-labeled investments. The first bill—the “Roll back ESG To Increase Retirement Earnings Act”—sponsored by Rep. Rick Allen (R-Ga.), prevents advisers from considering “non-pecuniary” factors, or factors not related to money, when giving advice.

Allen said in an interview that Biden’s rules, which replaced Trump’s, impose a political ideology on retirement plans.

“The White House does not need to determine how you invest your money,” Allen said. “This administration is forcing all of this on our economy and the American people—and the American people don’t like it. The American people want choice.”

But the bill doesn’t lay out what qualifies as pecuniary, thus introducing confusion into investment decisions and creating more work for advisers to affirm their guidance is prudent, said Natalia Renta, senior policy counsel for corporate governance and power at the left-leaning organization Americans for Financial Reform.

Fiduciaries need to weigh every risk and opportunity to provide the best advice for their clients, Renta said.

“If you try to create these categories of things that you shouldn’t take into account, then that just creates confusion and [puts] retirement security at risk if fiduciaries feel unsure of what they’re allowed or not allowed to consider,” she said.

Another bill in the package—the “Retirement Proxy Protection Act,” introduced by Rep. Erin Houchin (R-Ind.)—would block advisers from promoting “non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries.”

In the states

State attorneys general push back against participation of financial advisors in climate groups

Tennessee Attorney General Jonathan Skrmetti (R) led a coalition of 21 other state attorneys general in requesting information from large financial firms regarding their participation in certain climate groups, such as the Net Zero Financial Service Providers Alliance. The letter argued that participation in such groups could constitute noncompetitive behavior under antitrust laws:

Twenty-two state attorneys general, led by Tennessee’s Jonathan Skrmetti, are warning financial services companies that they may be violating antitrust and consumer protection laws by engaging in a climate activist alliance aimed at achieving net zero carbon emissions.

The letter to financial services providers that are signatories to the Net Zero Financial Service Providers Alliance (NZFSPA), which is identified as “a global group of Service Providers committed to supporting the goal of global net zero greenhouse gas emissions by 2050 or sooner.”

“We are writing to express our concern that your NZFSPA commitments may violate state and federal law, including antitrust laws and consumer protection laws,” the letter states. “Although many NZFSPA signatories are direct competitors with each other, they nevertheless commit to using their market influence to enforce their collective climate agenda in the broader economy.”

The attorneys general also remarked that “many companies may have no choice but to comply with your policy preferences, requiring them to restrict further the variety and output of goods and services that are not ‘aligned’ with your activist climate agenda” because of the “extraordinary market power of participants in the agreement.”

The alliance includes numerous powerful companies, including Deloitte, EY, Bloomberg, KPMG, and S&P Global.

The attorneys general highlight potentially problematic aspects of the alliance, such as an agreement among signatories to “coordinate their agenda with numerous other climate-activist pressure groups” and “coordinate their market pressure” to achieve the aims of the NZFSPA.

It goes on to request that the signatories “describe in detail all communications related to your commitments to NZFSPA,” as well as communications concerning membership in GFANZ. Signatories are also asked to describe actions they have taken to fulfill their NZFSPA obligations, as well as ways in which they have “materially deviated from your NZFSPA commitments.” The letter requests that the information be provided by October 13th. …

Will Hild, Executive Director of Consumer’s Research, lauded the attorneys general for “their important work defending consumers from yet another net zero conspiracy.”

“Financial services providers must understand that no matter what virtue signaling label they slap on it, collusion between members of an industry to drive up costs for Americans is immoral and illegal,” Hild said, pointing out the “massive potential liabilities” associated with the alliance. “They should cooperate with the investigation, and most importantly, stop conspiring against the public. No financial service provider has a legitimate reason to be part of NZFSPA.”

How will Alabama’s new law oppose ESG?

The Alabama legislature passed and Governor Kay Ivey (R) signed into law last spring legislation opposing the use of ESG in the management of public funds. This week, 1819 News published an update explaining what the new law does, to whom it applies, and why some people consider it controversial:

1819 News reached out to a spokesman with the Alabama Legislative Services Agency (ALSA), which provided professional support to the Alabama Legislature and assisted State Sen. Dan Roberts (R-Mountain Brook) and his colleagues in drafting the bill. 

The spokesman also discussed the particular application of the bill and the various exceptions included in the text to provide an in-depth understanding of how the bill functions as part of the law. …

[T]he law prohibits “governmental entities” from entering into “certain contracts” with organizations that engage in an “economic boycott.” It also protects companies in Alabama from being required by the government to participate in boycotts and requires the Attorney General to take action against federal law that penalizes companies for not participating. 

According to the legislation, a company engages in an economic boycott when it refuses business with or penalizes another company solely for any of the following reasons:

–          That company is in or involved with the fossil fuel, timber, mining, agriculture or firearm business.

–          That company does not or is not expected to meet environmental criteria not required by law.

–          That company does not or is not expected to meet certain employment, board compensation or disclosure requirements not required by law.

–          That company does not commit to facilitating abortions and sex change surgeries and treatment.

Under the law, companies are not prohibited from engaging in boycott activities unless they want to enter a contract with a “governmental entity,” which is any “state agency, department, regulatory body, board, bureau, or commission, or any county, municipality, incorporated or unincorporated local government, or other political subdivision of the state.” …

According to Section 2 of the law, contracts pertaining to the issuance or management of debt obligations do not, like other contracts with governmental entities, have to include written verification from the company that they do not engage in economic boycotts.

While battling to make it through the legislature, Roberts’ original bill was heavily amended following pushback from Birmingham-based Regions Financial and the company’s lobbyist, senior vice president and head of state government affairs and economic development Jason Isbell.

According to the enrolled version of the act, companies entering into contracts with governmental entities have to verify they do not engage in economic boycotts unless:

–          The company has less than 10 employees.

–          The contract involves a payment of less than $15,000.

–          The contract pertains to “the issuance, incurrence, or management of debt obligations.”

–          The contract pertains to “the deposit, custody, management, borrowing or investment of funds.”

Not entering the contract would significantly increase cost or limit the quality of options available, as determined by objective information available to the governmental entity.

Section 3 of the legislation prevents governmental entities from being penalized for complying with Section 2. Section 4 specifically protects companies in the state from being penalized for not engaging in economic boycotts, as defined earlier.

On Wall Street and in the private sector

Morningstar cuts back on Sustainalytics

Morningstar, the global credit ratings service, announced last week that it would cut jobs at Sustainalytics, its ESG ratings arm. The move comes after both Sustainalytics and its parent company have faced pressure from state officials related to their ESG policies:

Morningstar will reduce 10% to 12% of the global headcount of its Sustainalytics unit that provides research and ratings on environmental, social and governance (ESG) topics, a representative said on Wednesday.

Morningstar did not say how many people would be affected, but Sustainalytics lists having “1800+” team members on its website, meaning up to 216 jobs could be cut.

Chicago-based Morningstar had said in June that it would more closely align Sustainalytics with its Morningstar Indexes businesses.

“As a part of this alignment, we are in the process of making adjustments to strengthen the financial footing of the business. We remain committed to growing our ESG capabilities and will continue to invest in this area going forward,” said the Morningstar representative, Sarah Wirth, via e-mail.

Morningstar bought Sustainalytics in 2020.