After what one lawmaker dubbed "ESG month," a conservative movement pushing back against the investing principles and data has gained more policy substance through bills and hearings.
What's less clear is whether that growing political action will stem the flow of tens of trillions of dollars in assets invested into products tied to ESG criteria. Republican members of the U.S. House Financial Services Committee sent four bills to the full chamber last week that Chairman Patrick McHenry of North Carolina said would "restore our free markets and bolster American competitiveness, while protecting the financial interests of everyday investors."
"For the past month, committee Republicans have prioritized getting politics out of corporate boardrooms," McHenry said. "ESG mandates politicize capital allocation, with the intent to force certain actions from American public companies. This leads to reduced returns for everyday investors and weaker economic growth by diverting executives' attention away from sound financial management."
The bills, five different hearings and a report released in June by the Republican "ESG Working Group" led by Rep. Bill Huizenga of Michigan came after the introduction of at least 165 anti-ESG bills and resolutions at the state level, a lawsuit filed by state attorneys general seeking to block the Department of Labor's ESG rule and rising conservative pressure on giant asset managers. A Florida law signed by Republican Gov. Ron DeSantis that went into effect at the beginning of the month is so "far-reaching" that a report from the Harvard Law School on Corporate Governance said it had been "designed to block the consideration of ESG factors in investment decisions." One of his rivals for the Republican presidential nomination, Vivek Ramaswamy, has made opposition to ESG investing a central part of his campaign.
Federal anti-ESG bills still stand little chance of passing the Senate — where Democrats oppose them and are still in control by a slim majority — or of getting a signature from President Joe Biden. And ESG advocates speaking at an event last week cited their own successes in forging changes at publicly traded companies, despite a deluge of counterproposals by their opponents and lower levels of shareholder support for their own proxy efforts.
Socially responsible instruments and other impact methods remain "a core part of our investing practice," said Zach Teutsch, a managing partner of Washington, D.C.-based Values Added Financial.
"We are seeing higher than ever interest in ESG/impact/SRI investing," Teutsch said in an email. "Some people seek it out because they agree it will produce superior long-term returns and reduce risk. Others are more focused on making sure the world they leave to their descendants is still habitable. It might even be that polarizing attacks on ESG has made it more popular and driven additional attention."
Still, many conservatives believe that the three letters of "ESG" add up to a progressive agenda that is "not necessarily looking out for the best interest of the client at the end of the day," said financial advisor Thomas Mancuso, the founder of The BAD Investment Company. The firm's ETF invests in betting, alcohol and pharmaceutical firms that include cannabis companies. The ESG movement that has expanded so quickly over the past decade may be discouraging some firms from going public through the use of "social stigmas" in investing, Mancuso said.
"I do believe that there needs to be some intervention when it comes to value-based investing," he said in an interview. "Should it be forced upon us I think is the issue, and it's why you're seeing backlash."
The Financial Services Committee hearings focused on environmental and social policy in rulemaking, the proxy vote process, the impact of ESG investing on the housing and insurance industries and the political independence of financial regulators. In addition to a bill called the Ensuring Sound Guidance Act reintroduced in June by Republican Reps. Andy Barr of Kentucky and Rick Allen of Georgia, the four new ones reported out of the committee last week are targeting ESG as "the latest tool of progressive activists to force their left-wing ideology on Americans through our capital markets," according to a tweet by the Republican majority.
An "interim" report by Huizenga's working group last month identified eight "key priorities": reforming proxy votes; promoting transparency, accountability and accuracy; supporting the economic interests of shareholders; boosting oversight of large asset managers; ramping up scrutiny of ESG rating agencies; investigating federal regulatory efforts; enforcing statutory limits on government agencies and blocking European standards in the U.S.
"Investment advisors, asset managers, pension funds — I would argue some, not all, but certainly some — have been ignoring their fiduciary duty to shareholders or maybe de-emphasizing that," Huizenga told Politico earlier this month. "There's currently no requirement for asset managers to justify why they are voting for some of these things and especially if they're voting against an independent board. There's very little transparency with that. The SEC has not done its job, in my humble opinion, on encouraging capital formation."
The "anti-ESG crusade" caused large asset management firms "to proceed with caution" in their shareholder votes this year, according to Andy Behar, CEO of nonprofit shareholder advocacy group As You Sow. The politicization of shareholder engagement that has been taking place for decades means that there has been "a lot of misinformation swirling around really the most basic of business functions," Behar said at a webinar last week on the 2023 proxy vote season.
"The board reports to the shareholders," Behar said. "As shareholders, we have a responsibility to help our companies avoid risk. Also, when we own the entire economy as an index, and a handful of the companies are causing negative impacts to the whole portfolio, it is our fiduciary duty to take some action. So shareholder advocacy is really about ideas, about bringing new ideas to the table as a pipeline to solutions. We begin with research, we create metrics, scorecards and ways to measure long-term success. We generally request a dialogue with corporate executives and board directors, and we meet and point out potential risks. And we find solutions together."
