Some states are lobbying Congress to curb sustainable investing as the anti-ESG movement ramps up, creating uncertainty for financial advisers. Congress is now paying attention, after Alabama Attorney General Steve Marshall and Utah Attorney General Sean Reyes asked the law-making body to limit the impact of ESG.
The House Committee on Oversight and Accountability held two hearings in May and June, respectively: “ESG Part I: An Examination of ESG Practices with Attorneys General” and “ESG Part II: The Cascading Impacts of ESG Compliance.”
Sceptics said these hearings are simply the latest in a series of anti-ESG efforts, which law firm Ropes & Gray says have been coming “fast and furious over the last several weeks”. These include an open letter from 21 state attorney generals criticizing asset managers’ involvement with ESG matters and three New York City pension funds being sued for breach of fiduciary duty for selling their holdings in oil and gas companies.
The testimonies were split down the political divide. Republican Pat Fallon, for example, who chairs the Economic Growth, Energy Policy, and Regulatory Affairs Subcommittee insisted that some asset managers put ESG ahead of profit. Meanwhile, Democrat Cori Bush, who sits on the same committee, retorted that ESG factors can materially benefit companies’ profitability and stability.
ESG Clarity breaks down hours of testimony to bring you the main themes.
Fiduciary duty: principles vs profits
The crux of the bipartisan disagreement is around asset managers’ fiduciary duty to their clients. Attorney general Marshall said that prioritizing some investments over others based on “woke ESG principles instead of potential profitability is inconsistent with companies’ fiduciary duties.” Economist Stephen Moore from conservative think tank Heritage Foundation said that asset managers vote on ESG resolutions without the knowledge and approval of their clients. Republican members also said that asset managers’ allegiance to groups like CA100+ or the Glasgow Financial Alliance for Net Zero hinder their ability to do what’s best for their clients.
The Democrats, represented by Illinois state treasurer Michael Frerichs, testified that investment managers should be able to consider ESG factors, especially for public pensions, because their time horizon is so long that factors like climate risk are relevant. He said that “to ask investment professionals to ignore material risks and investment opportunities is asking us to stop doing our jobs.”
ESG alliances and proxy advisory firms under attack
Republicans raised concerns about groups like Climate Action 100+ and the Net Zero Asset Managers’ initiative impeding trade and commerce, pushing up prices and hurting consumers. Attorney General Marshall accused them of implementing “radical ESG plans” and “coordinating restricted investment and action toward specific companies unless ESG policy objectives are implemented.”
Meanwhile, proxy advisory firms also came under Republican fire. These influential firms, such as the Institutional Shareholder Services, compile research and data for institutional investors and give voting recommendations. They were accused of making recommendations based on the goals of ESG alliances rather than shareholders’ best interests. Concerns were raised about “racial quotas” violating anti-discrimination laws. Democrats pointed out that proxy advisors do not vote themselves, rather they give recommendations.
ESG disclosures and scoring under scrutiny
The Democrats’ testimony highlighted why companies should release ESG disclosures. Shivaram Rajgopal, a professor of accounting and auditing at the Columbia Business School, told the hearing that ESG metrics are useful as indicators of future performance but that existing reporting and disclosure models are not up to scratch. He stressed that ESG ratings are a work in progress, in response to Republican criticism of the inconsistency of ESC scores.
To conclude, asset managers that integrate ESG factors must prepare themselves for a grilling from Congress, predicts law firm Brownstein Hyatt Farber Schreck. The firm commented: “First, this hearing highlights the need for companies to conduct an internal review of all ESG statements made to consumers to determine whether those statements present any risk for congressional or regulatory scrutiny. This suggestion applies not only to companies in the financial services industry but any company using ESG as a decision-making tool.
“Second, companies that integrate ESG considerations should prepare for the most efficient mechanisms to articulate to Congress and state attorneys general the underlying business case related to ESG.”
Will Congress hold more hearings? It’s not been confirmed, but there have been rumblings of an imminent third hearing.