The Republican-led House is starting to ramp up its attacks on environmental, social and governance investing, putting the Democratic-led SEC and ESG backers on notice.
The House Financial Services Committee under Chairman Patrick McHenry (R-N.C.) is preparing to bring Securities and Exchange Commission Chair Gary Gensler to Capitol Hill to grill him on his agency’s plans to require climate disclosures from companies. Republicans on the panel this month also raised concerns with Gensler about his agency helping shareholders get ESG proposals on companies’ proxy ballots.
Democrats, meanwhile, are largely expected to serve as a bulwark to Republicans’ ESG volleys, with the Democratic-controlled Senate helping sideline House bills.
Embracing ESG may bring immaterial company disclosures and inhibit the fiduciary duties of loyalty and care corporate boards and asset managers have to investors, said Rep. Bill Huizenga (R-Mich.), a senior committee member. Huizenga said he plans to push Gensler on ESG and re-introduce bills that would limit BlackRock’s proxy voting power and restrict the SEC’s disclosure rulemaking authorities, as Republicans look to stymie the upcoming SEC climate rules and other environmental and social initiatives.
“Maybe we shouldn’t be plunging full steam headfirst into” ESG, Huizenga said in an interview with Bloomberg Law. “Maybe we need to think through this a little bit.”
Like Huizenga, McHenry has also indicated that he might take a targeted approach on ESG—a notable difference from a contingent of Republican politicians, including Florida Gov. Ron DeSantis, who have repudiated the acronym. At a CNBC CFO Council conference, McHenry said he isn’t totally opposed to ESG, explaining that his gripes are with corporations that pay more attention to politics than to the bottom line for shareholders.
“My attempt will be to separate out an understanding of the E, and S and the G rather than just group it all together and say it’s all bad,” McHenry said at the conference late last year. “We have to have a thoughtful, more nuanced approach that meets actually the needs of American society and what is reasonable for investors.”
Andrew Olmem, a Mayer Brown LLP partner who was previously the Republican chief counsel for the Senate Banking Committee, echoed the notion that ESG has nuances. “ESG is a more complex topic than simply pro or con, and that will likely come out in any hearings from Republicans on the topic,” he said.
Republicans in the most recent Congress succeeded in getting some Democratic support for bills that would force the SEC to limit, or completely abandon, its plans for large companies to disclose Scope 3 greenhouse gas emissions from their supply chains and other indirect sources. The 2022 proposal would direct companies to report various emissions details along with other disclosures about how climate change affects their businesses.
McHenry has the potential to win over some Democrats on ESG bills if he takes a more restrained approach legislatively and leaves more aggressive attacks on the SEC to oversight hearings, said Lisa Peto, a former chief counsel to Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee.
“It will be easy to spook off Dems if they come at it with a lot of the rhetoric that I think we’re already expecting,” said Peto, a partner at Washington lobbying firm Mindset.
Sending a Signal
The Index Act and Mandatory Materiality Requirement Act are among the ESG-related bills on Republicans’ radar. Huizenga said he intends to re-introduce the measures this year, after they failed to gain any Democratic support in the previous Congress.
The Index Act intends to dull the voting power of
Vanguard has said it is “working to offer our clients a greater voice in proxy voting.” The firm said in November: “Our clients have diverse perspectives, and a growing number would like the option to weigh in on how their index funds vote on important proxy questions at the companies held in the funds.”
“BlackRock offers our clients a broad choice of investment products with the sole goal of maximizing long-term returns consistent with their investment objectives,” the firm said in an email to Bloomberg Law. “We look forward to continuing to work together with Congress to strengthen America’s capital markets, help Americans plan and save for retirement, and safeguard asset owners’ freedom to choose financial products that best suit their unique individual needs.”
Seeking a legislative vote “sends a signal that there’s support for the issue” said Olmem, and sets the stage for the legislation to be enacted if there are changes in the Senate and White House.
Rep. Dave Joyce (R-Ohio) also has a resolution pending in the House Financial Services Committee that would let the chamber formally express its disapproval of SEC ESG disclosure requirements that it views as immaterial, though it wouldn’t impose any obligations on the agency.
Materiality will be a major focus of the Financial Services Committee’s work this Congress, said Evan Williams, senior director at the US Chamber of Commerce’s Center for Capital Markets Competitiveness, which has pushed lawmakers to pass the Mandatory Materiality Requirement Act.
“When materiality features at the center of the legislative agenda then so too does economic return feature at the center of the agenda and can be the guiding principle through which to look at the ESG rhetoric,” Williams said.
Republican concerns about materiality have been percolating since the Democratic-led SEC made ESG a priority in 2021 and issued its climate disclosure proposal last year. The agency is looking to finalize climate disclosure rules by April.
Huizenga, the chairman of the committee’s oversight and investigations subcommittee, said he intends to ask Gensler and other SEC officials to visit more frequently. The Republican said he’s also planning to soon write to the SEC chair, who last testified before the panel in 2021.
Gensler is expected to face scrutiny about the agency’s climate disclosure proposal and other ESG-related initiatives. Rep. John Rose (R-Tenn.) and other Republican committee members this year already have pushed Gensler to explain SEC actions that have helped shareholders put ESG proposals up for votes at companies’ annual meetings.
Companies regularly ask the SEC whether they can keep shareholder proposals off their proxy ballots. The SEC told companies in 2021 they will face greater scrutiny if they rely on previous agency decisions and old arguments for discarding proposals or seek to reject those that concern social policy issues.
“You will not be surprised that we will have some tough questions for Chair Gensler,” Huizenga said.
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