July is 'ESG month' for GOP leaders who want to limit do-good investing
House Republicans say the trend of companies making decisions that factor in climate change and other issues is 'a cancer within our capital markets.'
House Republicans plan to turn much of their focus this month to a divisive term in the corporate world: ESG.
What GOP leaders are promising is a concerted effort to roll back the years-long trend of investors and companies making environmental, social, and corporate governance (ESG) principles part of their decision-making mix.
There will be bills to change the rules that govern asset managers. Shareholder activism will be under the microscope. There are also plans to simply turn up the political heat over the Biden administration's handling of the issue.
Some are even calling July "ESG month" on Capitol Hill.
Rep. Andy Barr (R-Ky.) coined the term. He underlined during a recent Yahoo Finance interview that what he and his colleagues aim to do is at least get the ball rolling on deep reforms to a system they say is self-contradictory and counterproductive.
"The G in ESG I think makes a lot of sense to me but when the E is in conflict with the S and the S is in conflict with the G, I think that's where you see ESG as a colossal failure," he said.
The bottom line, says Barr, is the GOP belief that ESG as a whole is "a cancer within our capital markets."
The campaign comes even as parts of the corporate world have been backing away from ESG for months now.
After years of highlighting the principles in his annual notes, BlackRock (BLK) CEO Larry Fink now refuses to use the term at all. Another major money manager, Vanguard recently withdrew from a climate-focused consortium called the Net Zero Asset Managers initiative.
Tightening the screws
When the House of Representatives returns on July 11, lawmakers will have a host of strategies at the ready.
The Republicans' ESG Working Group, led by Rep. Bill Huizenga (R-Mich.), recently released an interim report that outlined many of the group's top issues. It's a guidepost of sorts for what is likely to be under consideration when the House Financial Services Committee gathers in a hearing tentatively set for the end of the month to finalize the various GOP bills.
A top priority will likely be efforts to tighten the screws around asset management firms focused on their outsized power in allocating resources.
Rep. Barr hails the recent voluntary moves away from ESG from BlackRock and Vanguard. But he also promises "we're going to continue to monitor whether or not these asset managers are actually living up to their commitments...and rejecting some of the more radical voices that want to use or exploit ESG to discriminate against American energy companies."
Barr is co-sponsoring a bill with Rep. Rick Allen (R-Ga.) to redefine the ESG acronym. Their Ensuring Sound Guidance Act would write into law a requirement that money managers prioritize financial returns above any non-monetary factors in investment decisions. The bill also takes aim at a recent Labor Department rule that allows — but doesn't force — fiduciaries to consider various factors in investment decisions.
House Republicans already passed a measure to register their disapproval of that Department of Labor rule on March. It led to the first veto of Joe Biden's presidency.
'Thorough investigations'
Another prong of the effort is set to be a focus on shareholder activism on both sides of the issue.
Conservative-leaning shareholders have pushed a record number of anti-ESG proposals at recent shareholder meetings. The number of anti-ESG resolutions on corporate ballots between January 1 through May 31 rose by more than 400% from 2020 to 2023, according to ISS Corporate Solutions, a Rockville, Md.-based provider of ESG data and analytics to corporations.
Republicans would like to encourage more of those anti-ESG measures but are also looking at ideas around stopping efforts from the other side of the issue. Climate activists often use the process to force companies to take positions on political issues.
The lawmakers have ideas that could force the SEC's hand around the rules it puts in place but they also are deeply wary of proxy advisory firms that they say hold outsized sway in what issues are put before investors.
Another key element of the effort will be political pressure aimed at Gary Gensler, the chair of the SEC. Gensler is currently considering new rules around ESG and has also taken heat for openness to coordinating with global ESG rules. GOP lawmakers are promising "thorough investigations" into Gensler as well as efforts to avoid what they describe as burdensome European Union regulations.
Some Republicans have also weighed in with even more aggressive efforts to defund the SEC or even restructure the agency to limit Gensler’s power — but the timeline for moving forward on those efforts remains unclear.
A campaign focus
Of course, the political heat around ESG is unlikely to go away anytime soon no matter what happens in Congress in the month ahead.
ESG has also emerged as a central issue on the 2024 GOP presidential campaign trail (Florida Governor Ron DeSantis likes to talk about "kneecapping" ESG). Democrats on Capitol Hill and elsewhere are also gearing up to defend the trend of including climate in investment decisions.
One key unresolved area of the debate to come is the all-important question of ESG returns. There are studies that found funds factoring in ESG have outperformed their competitors over the last 5 years. But there is also evidence that these returns may have been a mirage of sorts, with the hype around ESG leading to extra money in these sectors and driving up short-term returns.
Other research examining returns over a longer term suggests that similar or possibly lower returns are indeed possible.
At the end of the day, Barr acknowledges that it’s unlikely any of the bills will be enacted into law anytime soon with Democrats in control of the Senate and White House.
Nevertheless, he said the effort is worth it "even if it's an effort that takes multiple Congresses to get there."
Ben Werschkul is a Washington correspondent for Yahoo Finance. Alexis Keenan contributed reporting.
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