How will House speaker election affect GOP ESG pushback?

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.

How will House speaker election affect GOP ESG pushback?

Now-ousted Speaker of the House Kevin McCarthy (R) supported his party’s efforts to oppose and investigate ESG in the chamber. So what does McCarthy’s removal mean for House ESG pushback going forward? Lawyer and ESG opponent Jon McGowan, writing for Forbes, argues that the GOP’s ESG plans are unlikely to change going forward:

With the change in leadership will come a change in priorities. The top contenders to replace McCarthy, House Majority Leader Steve Scalise and House Judiciary Chairman Jim Jordan, have also taken strong anti-ESG positions. Scalise has actively pushed for hearings on ESG, attending the DOL ERISA override resolution signing ceremony and stating after the veto that “House Republicans will keep fighting to overturn this rule allowing ESG investing and to make sure Americans are getting the best retirement they can, not the most woke.” In anticipation to a series of committee hearings, he tweeted that “Woke CEOs who push the Left’s radical agenda at the expense of American families can expect to appear before Congress.”

Rep. Jordan has used the power of his committee chairmanship to further attack ESG. Since June, Jordan and the House Judiciary have been probing ESG funds as part of an ongoing investigation, issuing both letters and subpoenas, although the most notable hearings occurred in other committees in July as part of “anti-ESG month.”

The change in leadership will most likely result in a number of changes in legislative priorities. However, if either Scalise or Jordan assume the speaker role, it is safe to assume that anti-ESG stances will continue to be a priority.

SEC emissions disclosure rule could come later than expected

Securities and Exchange Commission (SEC) spokesperson Mellissa Campbell Duru said last week the expected October release date for the commission’s emissions disclosure rule was a best estimate that could be inaccurate, according to a Bloomberg Law report. Campbell Duru also said the SEC—like BlackRock CEO Larry Fink and others in the capital markets—wants to limit its use of the term ESG, opting instead to focus on what it calls emergent risks in its regulation. She said the commission wants “all material risks disclosed, whether or not they are labeled as ESG.”

Meanwhile, Bloomberg Intelligence argues that the holdup on the release of the emissions rule is mostly due to concerns about what the rule refers to as the Scope 3 emissions category:

The SEC’s proposed climate rule may bring clarity to help investors manage risks and provide more transparency to ESG funds, but there’s much uncertainty about what Scope 3 requirements might look like when the rule is finalized, likely in the fall. The regulation, delayed more than a year and still facing significant legal challenges, would set parameters for how businesses talk about climate change, from board oversight and strategic operations through transition planning and scenario analysis. Only about half of the Bloomberg 1000 have plans for this level of transparency.

The biggest uncertainty as the market awaits the SEC climate rule is disclosure requirements for Scope 3 emissions where these are material or included in targets. Companies would need to report Scope 3 if they’re material — or over 40% of total GHG emissions, based on unofficial guidance — with the caveat that a quantitative threshold shouldn’t be the only consideration. The proposed rule gives enough help on the definition of Scope 3 emissions and a safe-harbor provision to encourage companies to make a good-faith estimate, but it got considerable pushback because of the potential impact of reporting on smaller suppliers. Only a few US companies, mainly automakers (GM, Ford), oil companies (Chevron, Occidental) and airlines (JetBlue, United) have set Scope 3 targets and disclose emissions. …

The SEC is in a tough spot, weighing pressure from investors and progressive lawmakers concerned about climate against incremental costs of collecting Scope 3 data, particularly up the supply chain to small companies. However, we believe investor demand for climate transparency is within the SEC’s mandate, and is supported by the number of shareholder resolutions seeking this data in recent years. There have been 70 US shareholder proposals this year specific to climate-change risk or GHG emissions, up 40% from 2022. Momentum was boosted by SEC guidance noting references to well-established frameworks like TCFD to alleviate concerns over complexity. So far, several got support from over 33% of shareholders, including at JPMorgan, Paccar and Texas Roadhouse.

On Wall Street and in the private sector

British ESG selloff continues

British investors continue to withdraw capital from ESG funds, following the lead of American investors who have also been net sellers of ESG investment products and breaking with investors in other European countries who have generally remained net buyers. September marked the fifth straight month of outflows by UK investors:

UK investors pulled money from funds focused on environmental, social and governance issues for a fifth straight month in September, fund network Calastone said on Thursday.

ESG investing has suffered a political backlash, particularly in the United States.

UK investors took 485 million pounds ($589.4 million) from ESG equity funds, with around half of the redemptions coming from North American ESG funds, Calastone said in a statement.

Goldman Sachs predicts American ESG bond market slowdown

Goldman Sachs argued recently that the American ESG bond market could be slowing down this year. A slowdown in ESG bond issuance would mark yet another point of divergence between the ESG market in the United States and that in Europe:

Companies based in the U.S. are on track to halve the amount of ESG-labeled debt they issue this year, marking a clear departure from the trend on the other side of the Atlantic, according to an analysis by Goldman Sachs Group Inc. 

The U.S. slump reflects the different regulatory set-ups in the two regions, said Goldman analysts including Michael Puempel and Sienna Mori. In Europe, rules have driven the supply of debt that incorporates environmental, social and governance goals. In the U.S., meanwhile, utility and energy sectors, as well as the financial firms backing them, have retreated from the ESG bond market.

This year is likely to see just $40 billion of ESG corporate investment-grade issuance in the U.S. dollar market, according to the Goldman analysts. That’s half the amount issued by U.S. companies last year, and just 40% of the level reached in 2021, they said. The slump means that ESG-related issuance only accounts for 3% of total dollar-denominated supply in the investment-grade market, Goldman estimates. 

That’s “sharply down” from levels seen in previous years, when the relative share was double that, Puempel and Mori said.

Adding an ESG label to a bond is unlikely to improve its performance, according to the Goldman analysts. That said, there’s also no observable underperformance associated with labeling a bond ESG, they noted.

The findings fit broadly with an analysis by the European Securities and Markets Authority published Friday. …

In Europe, companies’ investment-grade ESG issuance has “held up better,” the Goldman analysts said, with the overall level of supply on track to reach €140 billion ($147 billion) this year.

Globally, ESG fixed-income funds have continued to attract client flows, with the 5.5% increase over the period beating the 3.6% seen among their non-ESG equivalents, Goldman said.

ESG scores matter to consumers—especially those who are wealthier and left-leaning

Jean-Marie Meier—a visiting assistant professor of finance at The Wharton School, University of Pennsylvania, and assistant professor of finance at the University of Texas at Dallas Naveen Jindal School of Management—recently wrote a post for the Harvard Law School Forum on Corporate Governance describing a working paper that she and several co-authors have been writing. There is strong evidence that retail customers care about ESG scores in their product purchases, according to Meier. Additionally, the researchers found that this correlation increased in shoppers who were wealthier and further left-leaning politically:

Using the Nielsen Retail Scanner Data over the period of 2008 to 2016, we find that a brand owner’s E&S rating is positively related to local product sales.  The result is economically large: a one-standard-deviation increase in the owner’s E&S rating is related to an increase in sales of 9.2% in the subsequent year for the average product sold in the same county.  Given that we compare very similar products during the same year, it is unlikely that this effect is due to the decision of the company to adjust its supply of products.  We also ensure that this effect is not due to changes in product quality or changes in firm characteristics, other than E&S performance.

We further consider the impact of demographic characteristics on the relation between E&S efforts and product sales and find that this relation is stronger in counties with more Democratic-leaning and higher-income households.  Thus, consumers’ political orientation and income are important in shaping their preferences to consume the products of companies that are more socially responsible.  Moreover, we also find that a firm’s product sales in a county are negatively related to the E&S performance of local rivals that sell the same types of products in the same county.  This finding indicates that consumers choose between alternative products based on the relative E&S performance of the companies in the market, thereby creating additional competitive pressure on firms to improve their E&S standards.  Given the granularity of our data, it is also unlikely that our results are spurious due to the lack of sufficient controls.

We conduct two additional tests to study the relation between a firm’s E&S activities and subsequent sales.  First, we analyze the relation between negative corporate E&S news and product sales at the monthly level and find that the release of negative firm news on E&S-related issues precedes but does not follow product sales declines.  Thus, consumers reduce their demand for products in response to negative news about the firms’ E&S practices, while there is no evidence that firms exhibit E&S concerns after poor sales performance.

Second, we exploit major natural and environmental disasters as shocks to the salience of E&S concerns for local consumers. In these tests, we hold the perceived level of a firm’s E&S performance and product characteristics constant and study whether an exogenous increase in consumer awareness of E&S issues affects the sensitivity of their consumption decisions to firm/product quality from an E&S perspective.  We measure the salience of an event to local consumers based on geographic distance from the county where the event occurred.  Our results indicate that sales become more sensitive to E&S ratings after the disasters, particularly for environmental and community ratings.  We also find that this effect dissipates with distance to the disaster counties, consistent with the importance of salience in shaping consumers’ response to E&S efforts.