Back to General Resources

An Examination of Environmental, Social, and Governance Practices with Attorneys General

House Committee on Oversight and Accountability

An Examination of Environmental, Social, and Governance Practices with Attorneys General

Wednesday, May 10, 2023

Topline

  • Republicans argued against ESG practices, saying they are an attempt to circumvent Congress.
  • Democrats said that ESG is simply another way to provide investors with necessary information.

Witnesses

Opening Statements

Chairman James Comer (R-Ky.)

In his opening statement, Comer said that Americans should be free to invest their own money in any legal investment strategy they choose. He argued that this freedom does not exist when asset managers use their clients’ funds to push ESG instead of returns. He also highlighted concerns that asset managers and activist shareholders are pushing a political agenda with their clients’ money, and agreeing to ESG pledges pushed by global advocacy groups. He said that these ESG pledges and commitments are often at odds with their clients’ best interests and happen without their clients’ knowledge. Comer also mentioned that ESG activists have infiltrated the broader market by influencing the two proxy advisory firms who together control more than 90% of the market, and he added that Biden Administration regulators have encouraged this activity.

To conclude, the chair stated that the ESG agenda prioritizes a leftist ideology over the growth of retirees’ investments. He argued that asset managers should understand that they are stewards of money that is not theirs, and their failure to act in the best interests of their clients is a dereliction of duty. He also warned proxy advisors to understand that they cannot intimidate and coerce companies to implement ESG policies without scrutiny.

Ranking Member Jamie Raskin (D-Md.)

In his opening, Raskin stated that the fossil fuel industry wants the government to stop the free market from responding to the climate crisis that it created. He also said that he hopes the Committee will hear from businesspeople and private asset managers/advisors as it looks into ESG. He argued that America’s most successful investors and asset managers have voluntarily and freely embraced responsible investment principles as a fulfillment of their fiduciary duty to minimize risk, maximize returns, and prudently plan for long term challenges like climate change. Raskin also claimed that states and the federal government should not force asset managers to steer investments into ESG stocks like wind or solar, and if investors want to invest in big gas, coal, and oil, that is their prerogative. He closed by stating that state anti-ESG laws threaten retirements, especially for public workers.

Testimony

Sean Reyes, Attorney General, Utah

In his statement, Reyes said that even though the Paris Agreement goals have never been adopted by Congress, they contemplate changes that are far reaching and fundamental. He added that these changes involve balancing tradeoffs including financial costs and benefits, how quickly/slowly the government imposes new technologies, and how reliable of a power grid the US will have. Reyes argued that as a country we should trust consumers, promote American energy independence, and avoid regulation. He also said that it should not be up to him, unelected bureaucrats, foreign governments, asset manager’s proxy companies, or anyone else to decide these issues. He stated that since the Paris Agreement, there has been an open conspiracy to bypass Congress using horizontal agreements by key players in the financial system, including Climate Action 100+ and the Glasgow Alliance for Net Zero, which include the largest asset managers, banks, and insurance companies globally.

Finally, Reyes highlighted three specific concerns the committee should investigate. First, the impact of asset manager agreements on utility companies and whether FERC is doing its job to ensure asset managers are improperly influencing the operations of utilities. Second, the role of proxy advisory firms and making recommendations for shareholders based on the goals of pressure groups rather than shareholders’ best interests. Third, the recent DOL rule allowing ERISA fiduciaries to consider collateral factors in investments and shareholder voting.

Steve Marshall, Attorney General, Alabama

In his statement, Marshall said that ESG poses unique challenges to Alabama consumers, as well as many of the state’s leading industries like steel, iron, coal, agriculture, and gas. Furthermore, he argued that ESG is a danger to consumers nationally and to democracy, and that since President Trump’s election, the global elites have formed alliances dedicated to implementing radical ESG plans. He said that this private coordination is designed to accomplish what could not be done through the free market or the democratic process, and that these alliances breach fiduciary duties as well.

Marshall also argued that ESG hurts consumers by increasing energy prices and threatening energy independence and national security. Despite this, he said that alliance members seem to be conspiring to reduce competition amongst themselves and coordinating to restrict investment in specific companies unless ESG policy objectives are implemented. On competition, he stated that ESG policies are subject to antitrust laws, and added that the Biden Administration has confirmed this.

Michael Frerichs, Illinois State Treasurer

In his opening, Frerichs stated that there is a widespread, coordinated, politically motivated attack on investors and the hardworking people they serve. He said the pushback is anti-free market, anti-investor, misleading, and harmful. He also explained that ESG is simply data—additional information that investment professionals use to assess risk/return. He argued that the more data investors have, the better informed their decisions are over the long term. In his role as Illinois Treasurer, Marshall said he does not ignore traditional factors, but rather integrates more data into his decisions to have a better idea of risk and growth prospects.

Finally, Frerichs said that it is irresponsible to tell investment professionals to ignore information that they can use to do their job better. He added that if unchecked, the war on investors will stifle economic growth, cost taxpayers/pensioners billions of dollars, and obstruct investors’ ability to protect and grow savings.

Question & Answer

ESG as Data

Raskin asked why more data would hurt. Frerichs said that it cannot hurt, and that investors need it to make good decisions. He said that ESG is useful, pertinent information. Raskin also asked how this job has changed over the last 50 years. Frerichs replied that the nature of value in the S&P 500 has changed dramatically, as today 80% of its value is in things like brands and IP, which are subject to different risks than companies were 50 years ago. Finally, Raskin asked if there is anything stopping states and investors from not looking at the data. Frerichs said some states are doing that, and it is costing them.

Rep. Paul Gosar (R-Ariz.) asked the two majority witnesses why this is not just about data. Reyes said that data can be bad if it distracts or distorts the import and focus of what fiduciaries should be solely laser focused on.

Rep. Alexandria Ocasio-Cortez (D-N.Y.) said that Republicans are making an argument to just look at balance sheets, short term returns, and short-term investments to make long term financial decisions. She said this is ironic because the committee is charged with investigating companies that have abused the public by leaving critical information off those balance sheets. Frerichs said that he cannot do his job with only short-term returns, as families saving for college and retirement do not care about whether a company is profitable next quarter. Rather, they care about the next 10-20 years.

Rep. Becca Balint (D-Vt.) asked how ESG factors help an asset manager assess investment. Frerichs said that these factors all deal with risk, and he tries to engage with the companies they invest in to make sure they continue to be sustainable in the long run. He also noted that there are easy levers a company can pull to be profitable in one quarter, but in the long run customers may leave or competitors may overtake the company. He reiterated that the question is whether companies should make decisions for the short term or the long run.

Free Market Principles and ESG

Rep. Katie Porter (D-Calif.) said that choice is an essential part of capitalism. She noted that many of investors want to know more than just dollars and cents when they are making decisions, not just liberals. As an example, she pointed to conservatives who have dumped stock in Disney and stopped buying Bud Light because they think it is too woke.

Fiduciary/Legal Duties and ESG

Rep. Clay Higgins (R-La.) asked about the legal requirements that asset managers who act as fiduciaries must adhere to. Reyes said that they have a fiduciary duty under laws like ERISA, which requires them to maximize shareholder value and maximize return back to the shareholder.

Rep. Russell Fry (R-S.C.) asked if asset managers can be forced to choose between legal duties and ESG goals. Marshall said that there is clearly a conflict. Fry also asked if asset managers are required to tell their clients when they enter into ESG pledges. Reyes said that is something the DOL rules just changed, and that previously it was required through transparency and disclosure.

Rep. Tim Burchett (R-Tenn.) also asked if there could be a scenario in which asset managers have to choose between ESG initiatives and their fiduciary duties. Reyes said absolutely, and that the short-term risk is capital risk, but the long-term risk is a more existential threat to the system of government.

Proxy Advisors/Voting

Rep. Kelly Armstrong (R-N.D.) asked about proxy advisors and proxy voting. Marshall replied that proxy advisors act outside of the directive of investors and make their own independent value judgments about how to vote on shareholder initiatives. He said they are connected through various alliances.  Armstrong also asked if Congress should consider restricting the use of robo-voting. Reyes said that automatic voting has given even more power to the proxy advisor duopoly of ISS and Glass Lewis. He noted that proxy advisory firms should focus on providing objective advice related to maximizing the value of shares of companies subject to shareholder proposals, but instead these advisors have public, purposeful statements about their end goals and objectives related to coal plants and fossil fuels.

Rep. Cori Bush (D-Mo.) asked if Republican attacks on responsible investing increase waste and mismanagement of taxpayer dollars. Frerichs said that attacks that limit the ability to access data cost states. He also noted that proxy advising firms advise the fiduciaries that make votes, but a good fiduciary will rely on their advice as well as other sources of information.

Banking and Insurance

Rep. Glenn Grothman (R-Wisc.) asked if Marshall could see a situation in which a bank is muscled into giving out more loans to people who have not saved money. The AG replied that he can see that or the opposite happening. He noted that the Net Zero Banking Alliance limits funding of certain projects, thus keeping capital from industries that are suddenly disfavored.

Rep. Melanie Stansbury (D-N.M.) said that this is a well-coordinated and political attack. Frerichs replied that it seems like the fossil fuel industry is leading the charge here. He also replied to a previous comment on banking by noting that banks have been muscled by legislation in Texas forcing them to invest in fossil fuels and punishing them for diversifying.

Rep. Lauren Boebert (R-Colo.) asked about the result of AG investigations into several of the Net Zero Banking Alliance groups. Reyes said he was not ready to disclose the findings yet, but noted that it is enough to continue investigations. Boebert also said that JP Morgan Chase bought Silicon Valley Bank, and asked if there has been any indication of the involvement of ESG policies while reestablishing the bank. Reyes was also not willing to comment.

Comer argued that Democrats do not understand that this issue affects banking and insurance, in addition to investing. He also said that ESG has become a political movement that is gaining ground on Wall Street and is affecting consumers and investors. On insurance, he asked about the risks that insurers are exposed to with the adoption of ESG factors in underwriting. Reyes said that they could be potentially liable in dozens of states for breaking the law. Reyes also said that on banking, efforts to de-bank based on solely ESG criteria is not out of the realm of possibility.

In response to Reye’s comment on banking, Comer pointed out that the San Francisco Fed’s website was all about ESG policy. Reyes predicted that if more and more insurance companies and asset managers withdraw from large horizontal agreements, there may be increased pressure on banks to de-bank.

Diversity Equity and Inclusion

Rep. Shontel Brown (D-Ohio) said that the inclusion of people from all backgrounds, especially marginalized communities, is an essential part of America’s corporate success. She added that companies have a moral obligation and financial incentive to make sure there is a seat at the table for historically marginalized groups. Frerichs agreed, and pointed out that research has shown that homogeneous boards underperform diverse boards.

Department of Labor Rule

Porter also said that the Labor Department’s rule does not impose a mandate, but rather permits fiduciaries to consider ESG standards if they believe those considerations are prudent in their decision making.

Rep. Pat Fallon (R-Texas) asked if President Biden should be allowed to gamble with the retirement funds and pensions of Americans. Marshall said no. He also pointed out that this is a bipartisan issue, and used the Senate vote to overturn the rule that the DOL had advanced as an example.

Balint also asked if the DOL rule is a mandate. Frerichs replied that if someone does not want to do the work that is their choice, but if his ability to access data is limited it will be more difficult to maximize returns in the long run.

State ESG Laws

Rep. Maxwell Frost (D-Fla.) asked why state bills against ESG are facing so much backlash even in Republican states. Frerichs said that they are anti-free market, will cost the taxpayers money, and are being pushed by special interests.

Impact of ESG on Consumers

Rep. Gary Palmer (R-Ala.) asked how ESG policies could impact consumers. Marshall said that the increased cost of energy can be partially attributed to decreased investment in what is currently producing energy in this country. Palmer also said that over 80% of the cost of fertilizer that is necessary for food production is natural gas. He stated that ESG investments are a threat to the economy and the food supply, and are also a huge help to China.

Congressional Action on ESG

Rep. Summer Lee (D-Pa.) asked if banning responsible investing would lead to worse returns. Frerichs replied with an analogy. He said it would be like saying that knowing the miles per gallon of a car you want to buy is an environmental impact, so you should not be able to know it. But in reality MPG will affect your costs down the road, so you should have access to that.

Boebert also said that BlackRock is a left-wing activist fund that uses its status as a fiduciary for several investment funds to coerce companies into introducing ESG politics into retirement account savings. She asked if Congress could ensure that companies are not introducing ESG policies into investment funds. Marshall said that Congress can clarify the role of a fiduciary under ERISA and what that means for the returns of individuals who have invested their accounts, and make it clear that objective criteria (not subjective ESG criteria) must be used for making decisions.

Shareholder Proposals on ESG

Rep. Anna Paulina Luna (R-Fla.) asked about the challenges faced by companies due to the increasing number of shareholder proposals related to ESG metrics. Reyes replied that they are being forced to choose a path that may not be yielding the best returns to investors or make choices that push consumers away from their own products.

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.