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Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation

House Committee on Financial Services

Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation

Wednesday, July 12, 2023

 

Topline

  • Democrats voiced support for transparency and ESG and argued that these factors increase diversity in financial services.
  • Republicans voiced concerns that the SEC is focusing too much on social issues such as climate change and has because too politicized.

 

Witnesses

 

Opening Statements

Committee Chairman Patrick McHenry (R-N.C.)

In his opening statement, McHenry discussed what he described as a disturbing trend from the Biden Administration’s approach to regulating our capital markets. He noted that rather than focusing on sound financial regulation, the SEC has turned its attention towards non-material, environmental, social, and political issues. McHenry blamed the Biden Administration and noted that their policies have led to increased costs and burdens for those participating in US public markets. He closed by stating everyday investors who rely on financial returns for their retirement savings bear the brunt of these consequences.

 

Committee Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters said that Republicans have a continued effort that aims to strip freedoms, rights, and opportunities away from women of color and members of the LGBTQ+ community. She said that Republicans have done absolutely nothing to examine racial or gender inequality in financial services. Waters showed support for ESG and stated that 80% of investors are supportive of ESG information because it empowers them to do whatever they want with their money. She closed by noting that ESG is not just about values, it’s about value.

 

Subcommittee Chairman Bill Huizenga (R-Mich.)

In his opening statement, Huizenga said that across the US, investors are being held hostage by those who don’t want to maximize retirement profits, but rather seek to push a far-left social and political agenda. He closed by stating Americans are waking up to this administration’s assault on their retirement accounts.

 

Subcommittee Ranking Member Brad Sherman (D-Calif.)

In his opening statement, Sherman said that under capitalism, the shareholders are entitled to the information they want even if Republicans don’t think they should have it. He closed by noting shareholders should be in control, not managers who don’t own the company.

 

Testimony

James Copland, Senior Fellow & Director, Manhattan Institute

In his testimony, Copland discussed how this hearing is timely in light of unprecedentedly aggressive new rulemaking at the Securities and Exchange Commission (SEC) that exacerbates the trend of centering our large corporate boardrooms on divisive policy concerns. He noted that U.S. securities laws have had a remarkable history of success, underlying the robust capital markets so essential to America’s long-run economic growth. Copland closed by noting that these trends both imperil American prosperity and interfere with our democratic, republican form of government.

 

Benjamin Zycher, Senior Fellow, American Enterprise Institute

In his testimony, Zycher discussed how this trend has been strengthened substantially by the deeply problematic proxy advisory process, and by the efforts of federal regulatory agencies to facilitate it and to extend their regulatory activities into matters with respect to which they have little expertise and only the most tenuous statutory authority, if any. He noted at the most general level, that process has evolved into a system in which proxy advisors with little personal stakes in the outcomes of management decisions can indulge their own political preferences through pressures on corporate managements, while bearing little or none of the ensuing consequences, however adverse in terms of the interests of shareholders due to reduced economic returns. He asked Congress to make it clear that only under new legislation can regulatory efforts to force reductions in GHG emissions be justified.

 

Lawrence Cunningham, Special Counsel, Mayer Brown

In his testimony, Cunningham noted that congressional action is needed to strengthen the protection of investors because events have overtaken existing law. He said that the Federal Shareholder Proposal Rule once used to improve corporate governance to protect investors is now attracting special interest in record numbers. He closed by noting that the production of shareholder proposals does not have widespread support in the U.S.

 

Ted Allen, Vice President, Society for Corporate Governance

In his testimony, Allen discussed that the SEC should reinstate the three legal bulletins that were repealed by SLB 14L and make clear that companies are not obligated to include shareholder proposals that relate to their ordinary business operations, cover topics that are already substantially addressed, or are economically irrelevant. He noted that the SEC staff should not be asked to make subjective judgments each year about whether a particular investor concern has become a significant social policy issue, and making such a determination is not within the SEC’s mandate. Allen discussed how investors should hold a meaningful stake to have access to a company’s proxy statement.

 

Keith Ellison, Attorney General, State of Minnesota

In his testimony, Ellison discussed that in Minnesota, one of the investment values that they have expressly adopted is that addressing environmental, social, and governance-related issues can lead to positive portfolio and governance outcomes. He noted that he believes that by taking a leadership role in promoting responsible corporate governance, SBI can contribute significantly to implementing ESG best practices, which should in turn add long-term value to SBI’s investments. He closed by noting that common-sense Americans cannot afford to have climate deniers, ideologues, and apologists for corporations run amok gamble with their life savings.

 

Question & Answer

Authority of the SEC & Politicization

McHenry alleged that the SEC does not have the authority to work on significant policy matters. Copland said that when it comes to big policy matters, Congress makes the decision on where legislation is supposed to go and not a regulatory agency.

 

Rep. Pete Sessions (R-Texas) asked if a case could be made against the SEC on the abuse of power regarding social policy and financial regulations. Copland said that the SEC should not be engaging in substantive policymaking.

 

Huizenga asked how the dominance of social and policy issues and corporate annual meetings conflict with social policy objectives. Copland said it’s all about the intention with the policy and that intention is the conflict overall.

 

Rep. Roger Williams (R-Texas) asked if the SEC continues to operate outside of their statutory purview, how their proposed climate disclosure rules will negatively impact financial institutions and small businesses. Copland said small businesses will lose access to credit and business, which could be devastating.

 

Transparency & Diversity

Waters asked Ellison what he thinks about transparency with private funds. Ellison said he thinks transparency is important and that we need transparency to ensure that minority groups are being invested in.

Rep. Emanuel Cleaver (D-Mo.) asked Ellison how companies can comply with ESG policies and make progress while profiting. Ellison said in Minnesota he doesn’t view consideration of ESG factors as an intention with risk adjusted rate of return as a priority and that they view it as something they need to do to be careful. He also noted that more diverse boards lead to more profitable firms.

 

Rep. Steven Horsford (D-Nev.) questioned if the government is focusing on costly, non-material issues at the expense of the U.S. public markets and asked Ellison if he has seen ESG mandates in Minnesota. Ellison noted that these expenses are coming from pension beneficiaries, who are a diverse group of Minnesotans who want the Minnesota SBI to think about governance, social factors, and environmental impacts.

Environment & Climate Change

Rep. Sean Casten (D-Ill.) asked if investors should get out of bond markets and oil and gas markets. Copland said no. Casten then asked Copland that since he said the ESG bill is going to come due because of long-term economic impacts, why Congress should take away investor choice in respect to that asset class, but not others. Copland said he doesn’t think Congress should take away the ability to invest in an ESG fund.

Rep. Andy Barr (R-Ky.) asked if the effort from multiple agencies to address climate risks about assessing climate-related financial risks or is it about creating financial risk for energy companies by redirecting capital away from those energy companies. Copland said it’s about redirecting capital away from energy companies.

 

Rep. John Rose (R-Tenn.) asked if it’s true that the SEC’s rulemaking on climate-related disclosures requires large, publicly traded companies to disclose scope three emissions if they have made climate-related targets or commitments. Copland said it’s true.

 

Rose then asked why SEC staff shouldn’t be making subjective judgements about whether a particular shareholder proposal is a significant social policy issue. Allen said that is an entirely subjective analysis, and it is beyond the SEC’s mandate to make such determinations.

 

Rep. Juan Vargas (D-Calif.) asked the panelists if any of them think human actions with the use of fossil fuels have contributed to current climate disasters. Zycher, Copland, and Ellison all agreed. Zycher notably disagreed with the current climate situation being classified a disaster.

 

Rep. Jim Himes (D-Conn.) asked all panelists if any of them disagreed with the scientific consensus that anthropogenic carbon burning is causing climate change. Zycher was the only one to raise his hand.

 

For more information on this meeting, please click here.

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