House committee issues more subpoenas related to ESG practices

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 committee issues more subpoenas related to ESG practices

The House Judiciary Committee issued more subpoenas last week in its ongoing investigation into whether some finance companies may have violated antitrust laws through their ESG investing practices:

House Judiciary Chairman Jim Jordan has subpoenaed BlackRock Inc. and State Street Corp. for documents related to the committee’s inquiry into whether their efforts to combat climate change violate US antitrust law, according to a person familiar with the matter. …

The documents are due to the committee by Jan. 12, according to the subpoenas. Subpoenas for Glass Lewis and Institutional Shareholder Services Inc. are being finalized soon, the person familiar said. …

Jordan, an Ohio Republican, on Monday subpoenaed Vanguard Group Inc. and Arjuna Capital as part of the environmental, social and governance investing, or ESG, investigation, a followup to requests for cooperation in July and August.

According to The Washington Examiner, the subpoenas include requests for information from the heads of BlackRock and State Street specifically:

The House Judiciary Committee has subpoenaed the heads of BlackRock and State Street for a trove of documents and communications related to ESG initiatives.

The subpoenas, reviewed by the Washington Examiner, were filed on Friday. They request information from BlackRock CEO Larry Fink and State Street CEO Yie-Hsin Hung about environmental, social, and governance investment decisions, which are collectively known as ESG.

In the states

State attorneys general push back against GOP ESG opposition

A group of Democratic attorneys general sent a letter to House Republicans asking them to stop pushing back against the 2022 Department of Labor rule allowing the use of ESG in ERISA-governed investment plans:

A group of Democratic attorneys general is defending the use of environmental, social, and governance factors in retirement plans, countering Republican attacks on ESG in both Congress and the states.

The group of 18 attorneys general wrote to congressional leaders in a letter Thursday in defense of a 2022 US Department of Labor rule that allows investment managers to consider ESG factors during investment decision making.

Fund managers should be able to consider all factors when making investment decisions to ensure maximum returns for investors, the Democratic attorneys general said.

Oklahoma officials take exemptions from state law opposing ESG

This year Republican elected officials seeking to oppose ESG in state investments have pushed back against some state financial officials who claim anti-ESG legislation and regulation would increase costs to the state’s funds. Oklahoma law requires the divestment of state funds from financial services firms that promote ESG-related policies. But officials have struggled to implement the law and find alternative financial firms and banks willing to provide services at a similar price:

In Oklahoma, where a new law requires the state to stop doing business with financial companies that “boycott” the oil-and-gas industry, officials and pension employees are running into hurdles while trying to comply.

In one instance, the state’s second-largest public pension found it would cost $10 million to move its money out of funds managed by BlackRock and State Street, two of the blacklisted companies. In another, the Office of the State Treasurer said it would be impractical to end its banking relationships with JPMorgan Chase and Bank of America. Both parties are taking exemptions to the new law.

Oklahoma is among several conservative states that have recently passed legislation targeting financial firms that have embraced ESG—or environmental, social and governance—investing principles. But no state has moved as fast to enforce a broad blacklist of financial firms, creating a case study in Oklahoma that Wall Street and other states are closely watching.

Florida governor argues ESG investing raises insurance prices

Florida governor and presidential candidate Ron DeSantis (R) told voters in Iowa over the weekend that he believes ESG calculations are driving up insurance prices:

Ron DeSantis continues to hone his messaging on property insurance, climate change, and the culture war, and the three topics became one mass on the campaign trail Saturday. …

“I think you have a lot of movement to things like ESG and climate change and stuff which is causing these policies to be more expensive, which I don’t think is a legitimate way to do it,” the 2024 presidential candidate said.

“But I think I’m concerned about this ESG, I’m concerned about them trying to say climate change and everything because that’s going to make some of these things very, very expensive if they’re pricing in all these things that very well may not happen. And that’s new from where we were 20 or 30 years ago.”

On Wall Street and in the private sector

Goldman Sachs closes ESG fund

ESG funds continue to close as American investors continue to sell their ESG fund holdings.  Goldman Sachs Asset Management last week closed its Large-Cap Climate-Change ESG fund:

Goldman Sachs, the ETF issuer with $30.6 billion in 41 ETFs, is shuttering a $7.64 million climate equity exchange-traded fund two years after its launch as ESG funds come under regulatory scrutiny and face conservative political backlash.  

The asset manager announced they were closing the Goldman Sachs ActiveBeta Paris-Aligned Climate U.S. Large Cap Equity ETF (GPAL) on Dec. 12. The fund is expected to liquidate in mid-January, according to the firm’s press release. …

While ESG investing surged in popularity in 2021, the sector has since struggled as it has faced conservative pushback. There were more ESG closures than launches in the third quarter of this year, according to data from Morningstar. ESG ETFs also saw about $2.7 billion in outflows in the third quarter.

In the spotlight

Defining ESG

ESG supporters and opponents have both argued that ESG lacks a standard definition. Conversations about ESG investing definitions have been in the spotlight lately as investors consider recent securities performances in their strategies.

For example, some ESG proponents oppose weapons manufacturing investments, but investments in such companies have performed well since the start of the Russia Ukraine conflict, raising questions about their place in ESG portfolios:

The wars in Gaza and Ukraine have renewed attention on environmental, social and corporate-governance investing for some everyday investors. The approach to socially responsible or sustainable investing is better known for a focus on clean energy, but some strategies also avoid investing in industries such as weapons manufacturing, tobacco and prisons. …

Investors also risk missing out on investment gains: Defense stocks typically rally at the onset of any conflict. Shares of General Dynamics have gained 14% since Hamas militants’ Oct. 7 attacks on Israel and Israel’s subsequent military campaign in Gaza. RTX has rallied 18% and Lockheed Martin has risen 12%, outperforming the S&P 500 over the same period. …

Executives of some military contractors signaled to shareholders on their recent earnings calls that the war in Gaza could increase sales of weapons. General Dynamics Chief Financial Officer Jason Aiken said the company has already experienced increased demand for artillery since the onset of Russia’s war in Ukraine.

Meanwhile, the world’s largest class of ESG funds increased their exposure last week to fossil fuels, raising questions about the industry’s sustainability and net-zero goals and definitions:

Funds that are registered as “promoting” environmental, social and good governance metrics had about 2.3% of their holdings in fossil fuel assets at the end of the third quarter, up from 1.4% right after Europe introduced a framework for ESG investing in early 2021, according to data provided by Morningstar Inc. Exposure to renewable energy assets slipped to 0.3% of total holdings from 0.4% in the same period, the data show.

The development, which reflects changes in asset valuations as well as outright purchases, follows a spike in oil prices triggered by the Ukraine war and a “terrible year” for renewables, Hortense Bioy, global director of sustainability research at Morningstar, said in an emailed response to questions. …

ESG fund managers may soon get a more explicit go-ahead from regulators to hold fossil fuels. In Europe, where ESG investing rules are the world’s most far-reaching in scope, authorities are in the process of reviewing the framework they enforced in early 2021, and how to treat so-called brown assets will be a key focus.