ESG Part II: The Cascading Impacts of ESG Compliance

House Committee on Oversight & Accountability

Subcommittee on Economic Growth, Energy Policy, & Regulatory Affairs

Subcommittee on Health Care & Financial Services

ESG Part II: The Cascading Impacts of ESG Compliance

Tuesday, June 6, 2023

Topline

• Republicans slammed Democrats and asset managers for prioritizing ESG goals over profits, and accused the Biden Administration of weaponizing ESG to rewrite the fabric of America with woke policies.
• Democrats noted the light Republican attendance at the hearing, which they said demonstrated Republicans’ knowledge that their attacks on ESG are unpopular and out of step with the American people.
• Democrats argued that ESG expands economic freedom and benefits investors by including information relevant to understanding future risk.

Witnesses

• Mandy Gunasekara, Director, Center for Energy & Conservation, Independent Women’s Forum
• Jason Isaac, Director, Life: Powered, Texas Public Policy Foundation
• Stephen Moore, Distinguished Fellow in Economics, Heritage Foundation
• Shivaram Rajgopal, Professor of Accounting and Auditing, Columbia Business School

 

Opening Statements

Subcommittee on Economic Growth, Energy Policy, & Regulatory Affairs Chair Pat Fallon (R-Texas)

In his opening statement, Fallon explained that Americans should trust their investments will be used to make a profit and achieve financial security, but they are left wondering if they can afford retirement because the Biden Administration has driven inflation to record highs. He noted asset managers are prioritizing ESG goals over profit and risking Americans’ hard-earned money, while simultaneously forcing companies to hire teams of lawyers and compliance consultants to comb through internal data due to an ever-changing list of leftist social norms. He criticized the Biden Administration for placing political ESG priorities over Americans’ retirements and noted that President Biden vetoed Congress’ bipartisan resolution overturning his ESG rule. Fallon concluded that ESG is being utilized in an attempt to rewrite the fabric of America with woke policies.

 

Subcommittee on Economic Growth, Energy Policy, & Regulatory Affairs Ranking Member Cori Bush (D-Mo.)

In her opening statement, Bush noted that ESG elements have material and defining benefits on companies’ bottom lines, adding that companies who responsibly address this reality carry less risk. She described companies that deny these consequences as delusional and dangerous. Bush discussed how ESG principles are designed to protect investors, workers, and retirees from the financial risk of bad business practices, emphasizing that responsible investing depends on ESG data. She also noted the SEC is working on rulemakings to require publicly traded companies to disclose climate risk information and make ESG disclosures more standardized, consistent, and reliable.

Bush described Republicans’ political crusade against ESG as an attempt to manufacture a culture war and protect corporate special interests. She noted that in 2021, Texas barred municipalities from contracting with banks that have ESG policies regarding fossil fuel and firearm companies, a decision that cost taxpayers an additional $300-$500 million in the first eight months alone. Bush said the majority of the public opposes government restrictions on responsible investing and concluded by affirming that transparency and responsible management of ESG risks is the bare minimum we should expect of corporations.

 

Subcommittee on Health Care & Financial Services Chair Lisa McClain (R-Mich.)

In her opening statement, McClain explained that it is not a money manager’s job to pursue a political agenda. She discussed the uptick in woke American corporations importing European values, and said these corporations are not telling their clients about the risks of adopting these values. McClain argued Americans should have the freedom to invest their money in the causes they believe in, and noted Americans’ retirement assets were down 15% last year. She said some states, like Texas and Kansas, are getting in front of this decline by advancing laws to restrict investments that consider non-financial factors like ESG for state pension funds. McClain concluded by discussing the Biden Administration’s recently issued ESG rule, noting the President vetoed a bipartisan resolution overturning his rule.

 

Subcommittee on Health Care & Financial Services Ranking Member Katie Porter (D-Calif.)

In her opening statement, Porter said Republicans want to force Americans to pick investments based on dollars and cents alone, which would limit economic freedom. She noted that if one values investing in a company that prioritizes energy efficiency, one can’t make that free choice if Republicans limit information on that company’s environmental footprint. Porter explained that Republicans don’t want investors to know if a hugely profitable company outsources to China, has a huge carbon footprint and is unprepared for climate change, or treats their workers horribly. She concluded that withholding ESG information from the market denies investors the freedom to decide where they want their dollars to go.

 

Testimony

Mandy Gunasekara, Director, Center for Energy & Conservation, Independent Women’s Forum

In her testimony, Gunasekara explained how ESG manipulates markets, as well as access to markets, to advance a leftist political agenda. She added the policies pushed by ESG cause more harm than good.  Gunasekara said “E” standards result in higher cost energy, unreliable electricity grids, and stand to undermine environmental progress, while also enriching high-end asset managers at Blackrock, State Street, and Vanguard at the expense of retirees and pensioners. She noted the “S” standards force companies to engage in controversial political issues, such as campaigns to defund the police or promoting gender transitions in children, cultivating division in the workplace and the marketplace. Gunasekara concluded that “G” standards give the appearance of diversity while restricting freedom of thought and competing viewpoints in the workforce.

Gunasekara discussed how ESG-driven divestment from oil and gas companies is undercutting our grid stability and broader energy security, while also putting American families and communities at risk. She said numerous reports have found that ESG funds consistently perform worse than non-ESG funds producing lower returns for the retirees and pensioners. Gunasekara noted that adhering to the Left’s cultural standards is becoming a litmus test for access to markets as well as credit and investors, concluding that ESG was developed to achieve leftist goals that have failed to gain traction in Congress and state legislatures and are increasingly being shut down by the courts.

 

Jason Isaac, Director, Life: Powered, Texas Public Policy Foundation

In his testimony, Isaac discussed how ESG investing threatens our economic prosperity and enables China’s abysmal human rights and environmental records. He said ESG should be known as “everyone’s suffering guaranteed.” Isaac explained how ESG infiltrated the U.S. economy and is weaponized against essential industries all of us rely on, including fossil fuels, agriculture, and forestry. He discussed how in 2020, he began drafting legislation that became Texas S.B. 13. Isaac noted that his bill banned companies who boycott, sanction, or divest from companies that produce energy in Texas from doing business with the state of Texas. He added that his bill passed with broad, bipartisan support. Isaac said 11 financial institutions are now on the boycott list in Texas, including Blackrock.

Isaac noted that between 2015-2021, there was an 81% reduction in the number of funds that provide private capital raised for oil and gas exploration in this country. He explained this decrease is making energy more expensive, adding the China-ESG agenda is not about emissions, but about control.

Isaac explained that ESG investing isn’t just harmful to our economy and energy industry—it could violate antitrust laws. He concluded that ESG investing has become a wrecking ball that could destroy entire industries and cause even more painful inflation.

 

Stephen Moore, Distinguished Fellow in Economics, Heritage Foundation

In his testimony, Moore discussed the recently completed study, “Putting Politics Over Pensions,” which examined the 40 largest investment firms in America, including Blackrock, Charles Schwab, Fidelity, and Vanguard. He said the study found that these companies are doing proxy voting and are voting for resolutions contrary to the interests of their shareholders. Moore noted these firms are violating their fiduciary duty and letting political biases interfere with sound business practices. He explained how ESG investing underperforms the market, noting that ESG funds are costly to the economy. Moore said that thanks to President Biden’s policies, the U.S. is producing two million fewer barrels of oil each day, which imposes a $200 billion cost on the American economy. He concluded that ESG investing requirements are making America poorer and shifting production to our adversaries – with no net benefit to the environment.

 

Shivaram Rajgopal, Professor of Accounting and Auditing, Columbia Business School

In his testimony, Rajgopal explained that ESG is about the material factors that affect the future cash flows and cost of capital of a firm. He said he thinks of ESG as a term that covers data that is not adequately disclosed by existing financial reporting model and mandated disclosure rules. Rajgopal noted that while climate and extreme weather-related events already affect the cash flows of insurers and travel and tourism related companies, current reporting rules in the U.S. don’t require systematic disclosure of the impact of such climate related physical and transition risks on the affected firms’ future cash flows and cost of capital. He described ESG as a free market, organic, and investor driven movement to ask firms to disclose more information about the described factors associated with their future cash flows or cost of capital. Rajgopal explained that investors would be derelict of their fiduciary responsibility to their stakeholders if they did not consider the material factors when making an investment decision, noting the prohibition of the consideration of material ESG factors interferes with the provision of data to make asset markets efficient at pricing these risks and returns.

Rajgopal cited evidence to suggest that substantial losses will be incurred by the constituents of states like Texas, where legislation that infringes on the public pension fund’s freedom to invest has been passed in recent months. He concluded that investors and asset managers cannot afford to ignore financial risks posed by overlooking material ESG data relevant to understanding the future cash flows and risks of stocks, bonds and other assets.

 

Question & Answer

State Laws & Regulations

Porter noted the Kansas Division of Budget conducted a study and found that Kansas’ anti-ESG legislation would cost its retirement system $3.6 billion in reduced returns over 10 years.

Porter cited the Texas law, and asked whether it is better for municipalities to have more options for loans or fewer options for loans. Rajgopal noted this is a simple supply and demand issue, explaining that if you cut off suppliers but demand remains constant, the price of that service will increase.

Bush said Republican attacks on ESG hurt taxpayers, citing Texas S.B. 13 as an example, noting the anti-ESG bill cost taxpayers an additional $300-500 million in its first eight months.

Rep. Jamie Raskin (D-Md.) noted six Republican states, Florida, Louisiana, Kentucky, Missouri, Oklahoma, and West Virginia are considering adopting Texas’ anti-ESG legislation. He said these states stand to lose millions.

 

ESG Benefits

Bush asked why it’s important for ESG metrics to be publicly available. Rajgopal replied that the current reporting disclosure model is woefully inadequate. Bush noted that ESG is good for our planet, and good for business.

Rep. Eleanor Holmes Norton (D-D.C.) asked how considering ESG offers more choices to investors.

Rajgopal said ESG provides investors with risk factors related to the future costs and earnings of a company. Norton asked if restricting the consideration of ESG data restricts the ability of investors to make choices? Rajgopal said yes.

Norton asked how Purdue Pharma filing for bankruptcy impacted their investors. Rajgopal noted investors lost all their money. Norton asked if asset managers should have been able to choose whether to consider the inherent risk associated with investing in Purdue because of the opioid epidemic. Rajgopal said absolutely, adding that any good analyst should have asked these questions.

 

Republican Criticism

McClain asked who enforces ESG compliance. Isaac said this is arbitrary. McClain then asked if enforcement has something to do with coercions. Isaac said absolutely, noting the climate cartel is at work. He explained that FTX had no governing board but had a higher ESG rating than ExxonMobil.

McClain noted one of her Democratic colleagues said ESG is a more efficient investment strategy and asked the witnesses to respond to that assertation. Moore said there are scores of studies that show ESG investing reduces returns, noting oil and gas was the top returning industry of the Fortune 500 last year. He explained ESG divested in oil and gas as their stocks went up.

McClain said anti-competitive ESG practices, including banks conspiring with climate activists, force businesses to adhere to enormous compliance costs. She added that investors are getting a green light from the government to prioritize their interests over Americans’ financial interests and pledged to investigate the matter further.

Fallon said ESG is a sham that is being forced on people. He added that ESG funds underperform, and said Republicans are pulling back the curtain on massive financial institutions. Fallon also argued against ESG by alleging that racism is a diminishing phenomenon.

Rep. Glenn Grothman (R-Wisc.) asked if a company that gets a higher ESG score is more likely to discriminate against certain ethnic groups. Isaac said yes, noting that company will have policies that don’t employ people based on merit. Grothman asked if there are companies that get high ESG scores for discriminating against white people, but his time expired before the witnesses could answer.

 

Democratic Pushback

Bush said adherence to ESG principles protects workers and communities, adding that Republicans only value the corporate bottom line and short-term profits.

Rep. Shontel Brown said the hearing reflects a Republican-manufactured crisis, noting that ESG is a critical tool that businesses use to make financially smart investments. She added that ESG is not a liberal conspiracy, but common sense.

Brown asked if the banning of ESG data is politically motivated. Rajgopal said this is regrettable, adding that markets can’t be efficient without data. Brown said her Republican colleagues abandon their free-market principles when it does not fit their narrative.

Norton said Democrats are for transparency in investment decisions.

Rep. Melanie Stansbury (D-N.M) said she was perplexed why the hearing was held, explaining a previous hearing on ESG already established that attacks on ESG investing are wildly out of step with the American people, corporations, the market, and basic freedoms.

Stansbury said Republicans are on another culture war crusade against the American people and market, adding that the American people and businesses disagree with those opposed to ESG and diversity. She concluded that Americans want climate action and sustainable investing.

Rep. Becca Balint (D-Vt.) said the hearing was a colossal waste of time. She cited Gunasekara’s testimony which said the dangers of ESG include promoting gender transitions for children, and asked if Gunasekara sincerely believed investing strategies are weaponized to support and promote gender transitions for children. Gunasekara said this is a matter of fact.

Rep. Summer Lee (D-Pa.) noted Republicans, who called the hearing, did not even bother to show up. She said that demonstrated how pointless the hearing is.

Raskin said no one forces people to invest in ESG, explaining that the Department of Labor rule does not impose mandates on anybody. He added Republicans did not show up to the hearing because they know they are going against market freedom, consumer sovereignty, and socially conscious decision making that people want. Raskin concluded that looking only at the bottom line is a ridiculous way to invest.

 

Pension Funds

Porter asked whether it is better for pension fund managers to have more or fewer options for investing people’s retirement savings. Rajgopal answered that more options are better. Porter asked if limiting pension fund investment managers’ options will increase retirement savings. Rajgopal said no.

Rep. Jake LaTurner (R-Kans.) asked Moore to elaborate on the financial liabilities that retirees’ savings are exposed to under the Biden Administration’s ESG standards. Moore said the preponderance of studies show that ESG investing reduces return. He noted this is a real cost to retirees, adding that you can’t force people to invest in ESG funds without their knowledge. Moore concluded that’s exactly what firms and the Biden Administration’s requirements are doing.

 

Environment & Energy

Fallon asked if we could justify the “green at all costs approach” that threatens to wipe out our most reliable energy sources. Gunasekara said no. She explained that ESG transfers the demand for energy overseas to countries like Russia, which undermines environmental progress.

Fallon asked what Congress should be most concerned about regarding ESG and the future of American energy independence. Isaac said ESG is discrimination against American energy producers.

Lee said Republicans prop up the fossil fuel industry with attacks on ESG, noting the three Republican witnesses testifying all work for organizations who receive their funding from the fossil fuel industry.

Lee asked why the fossil fuel industry fights so hard to prevent ESG factors from being considered in investing. Rajgopal said companies have a hard time changing course. Lee responded most Americans are demanding action on climate change and called on Republicans to wake up.

LaTurner noted energy was the sole sector in the S&P 500 that rose last year.

 

Fiduciary Duty

Fallon asked if investors and money managers legally owe fiduciary duty to their clients under federal law. Moore said companies like Blackrock and State Street are voting on ESG resolutions without the approval or knowledge of their clients, which he described as a big problem.

Porter asked why Republicans don’t want investment managers to use ESG. Rajgopal said that as a fiduciary, one is failing in their responsibilities if they are not looking at the signals for future risk.

 

For more information on this meeting, please click here.

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