Last month, the Republican Environmental, Social, and Governance Working Group (ESG Group) unveiled an interim report outlining GOP efforts to combat the ideological subversion of U.S. financial institutions. The nine-member Working Group launched in February and is headed by Rep. Bill Huizenga (R-MI), Chairman of the House Financial Services Committee’s Oversight and Investigations Subcommittee.
The ESG Group was largely formed as a rebuke to the regulatory overreach of the Securities and Exchange Commission’s (SEC) attempt to mandate climate disclosures. The group sought to reestablish the traditional definition of “materiality” in order to counteract activist attempts to redefine material relevance to encompass non-financial environmental concerns. Additionally, the group sought to hold proxy advisory companies responsible for misuing the proxy process and asset firms for abusing their outsized influence when advancing ideological preferences through shareholder proposals. The group aims to prevent market participants from circumventing democratic lawmaking to impose corporate ESG policies on a company’s shareholders.
Broadly speaking, the group is working to instill greater transparency in the proxy advisory process and the shareholder engagement practices of major asset management firms, demand accountability in the shareholder voting process, and conduct greater oversight toward unorthodox regulatory efforts by independent agencies—particularly the SEC—to impose unsanctioned climate policy.
Members are doing all of this in hopes of developing political safeguards that will protect the financial interests of individual investors. Absent such congressional awareness, shareholders may find themselves helpless to meaningfully engage with unpopular ESG policies recently embraced by so many financial firms.
This ESG Group serves as a collaborative effort by select members of the House Financial Services Committee to expose the dangers of progressive ESG policies on America’s capital markets. The report is the first in a series of steps that concerned Republicans are taking to safeguard American investors and businesses from governmental attempts to advance ESG doctrines. Upon releasing the interim report, the House Financial Services Committee is soliciting suggestions for future reports, legislative changes, and general feedback from stakeholders.
This report focuses on the harms of ESG policies to everyday investors in America. Subsequent reports from this ESG Working Group will issue policy recommendations for intended reform. According to this report, the Republican group seeks to craft “a policy agenda designed to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans.” Public companies are encouraged to shift their primary focus away from pursuing non-financial political interests and back to expanding the value of their capital investments.
One of the primary targets of the SEC’s ESG agenda is a little known 2021 bulletin called the “Staff Legal Bulletin No. 14L (CF),” which created a streamlined process for activist shareholders to propose ESG-related ballots during the proxy voting season. Simultaneously, the bulletin made it more difficult for companies to prevent such measures from obtaining consideration, as the SEC pledged a greater focus on the social policy matters embedded in each proposal, rather than the company’s actual connection to the measure.
That action led to hundreds of ESG proposals from activist shareholders exploiting the new standard. The SEC permits any investor with at least a $2,000 ownership stake in a company to submit a proposal. Company are thus powerless to ignore a flood of suggestions, including those that were previously rejected. To counteract this, the Republican Work Group advises that the SEC raise the threshold for shareholders to present such proposals.
The Group also suggests that the SEC make good on its proposed 2020 reforms toward proxy advisory firms, requiring that they be more transparent. One proposal demands that firms disclose any potential conflicts of interest, while sharing more accurate and extensive material about proposals with their clients prior to recommending votes on them. These reforms were rescinded by SEC staff after a bureau-wide directive was solicited by Chairman Gary Gensler early in his tenure.
In addition to disclosing their potential conflicts, the group believes wants proxy firms to publish a comprehensive list of their activities, with an emphasis on disclosing the financial justification made when arriving to its recommendations.
The group calls for the prohibition of “robo-voting,” the system where an asset firm automatically accepts the voting recommendations of the proxy advisor without any review. This process makes it impossible for shareholders to exercise proper consideration over the issues undergirding the shareholder proposal process, while entrusting too much faith into unvetted proxy advisors. Removing the robo-voting mechanism “will allow for greater due diligence, thereby protecting the economic interests of retail investors,” according to the group.
The report issues notable criticism to the lack of reliability and consistency from the valuations produced by ESG rating firms. ESG ratings between the largest firms often correlate less than 35 percent of the time. Additionally, there is much concern over how such ratings are unreliable predictors of a company’s financial performance, given the varying methodologies used, subjectivity from certain ESG criteria being prioritized by some companies and not others, and misalignment between an investment fund’s sustainability and its prospect for generating financial value in the market.
The ESG Group concludes its report by covering several issues at play with the SEC’s ongoing attempts to integrate ESG requirements in its disclosure regime without congressional approval. The SEC’s pending climate disclosure rule is the most controversial of these initiatives, as it would radically alter the existing definition of materiality, while forcing many unwilling companies to become stewards of corporate sustainability. Second to this is the Commission’s plan to enact a human capital management disclosure, overhauling its previous principles-based approach. Currently, companies must disclose their human capital management policies and objectives only if they are deemed to be material. The new approach would force companies to issue specific data on their human management practices regardless of its value.
The Republican ESG Group’s interim report provides a good analysis of some of the most controversial elements of recent ESG policies. Concerned nonprofits and affected for-profit organizations should take advantage of these research findings to raise more awareness against ESG developments on Capital Hill and petition those government actors responsible for adopting such measures.
Pressure should also be exerted against select asset managers and proxy advisory firms referenced in the report’s findings for operating in violation of established fiduciary responsibilities. This report represents a productive step toward advancing meaningful policy reform on ESG.