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Republicans Ready ESG ‘Attacks’ With House Control (1)

Nov. 17, 2022, 2:31 PMUpdated: Nov. 17, 2022, 11:17 PM

Republican control over the House means Rep. Patrick McHenry will have a pedestal—and subpoena power—to stall the administration’s regulation of the financial sector in the 118th Congress.

The North Carolina Republican and future chair of the House Financial Services Committee will likely bring a consistent mix of oversight of regulators such as the Securities and Exchange Commission; legislation to promote business-friendly measures; and criticism of environmental, social, and governance (ESG) investing.

“When it comes to oversight, exposing this administration’s failures and regulatory policy that’s driven up the price of things for average Americans is front and center for our agenda,” McHenry said Nov. 4 during an interview with David Westin on Bloomberg TV.

Graphic: Jonathan Hurtarte/Bloomberg Government; Photo: Getty Images

Yet economic conditions, forecast to worsen, will continue to drive the committee’s focus on banking-related issues. A US recession is “effectively certain in the next 12 months,” according to Bloomberg Economics model projections released ahead of the midterm elections. US inflation reached a 40-year high of 6.5% in September, along with soaring food costs and increased mortgage rates that reached 7.1% in October, the highest in more than two decades.

Megabank Hearings, ESG

Hearings featuring leaders of the biggest investment and retail banks in the country, a trend started by Rep. Maxine Waters (D-Calif.), won’t go away, Isaac Boltansky, managing director at BTIG, said.

Even though Republicans like to tout their pro-business platform, they still have bones to pick with megabank CEOs. In the last four years, banks have responded to social movements with material internal changes to their businesses.

Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co. have said they would discontinue lending to gun companies that manufacture military-style weapons for consumers.

That came to an end last year when Republican-led Texas decided in response to discontinue bond sales to those banks. Still, McHenry, with his caucus in tow, will keep the heat on big banks to ensure they return to normalcy, Boltansky said.

“There will probably be pretty much nonstop hearings with a focus on so-called ‘woke capitalism,’” he said.

Republicans have voiced their concerns with ESG investing, citing underperformance, high-cost energy expenses, and harm to the oil and gas industry. They’ve also been highly critical of ESG regulations, like the SEC’s proposed climate-related disclosure rule for public companies.

Because Democrats tried but failed to enact ESG laws, the administration picked up the slack, McHenry said on Bloomberg TV.

“They’re pursuing, through regulatory fiat, climate obligations on public and private companies through securities regulation,” McHenry said. “We’re going to highlight the cost of those regulations to the average American and the average small business person, and the impact that has on our economy.”

Republicans are likely to push measures, including the Ensuring Sound Guidance Act (H.R. 7151), which would eliminate the SEC’s climate-impact disclosure rule, to force investment advisers to prioritize clients’ financial gains over ESG factors.

Raymond James financial policy analyst Ed Mills agreed—Republicans will use hearings to “beat up” Biden administration regulators and admonish ESG-minded activity in the financial services industry.

“I don’t think they’re critiques, they’re outright attacks,” Mills said. “It would be a lot more beat-up-the-regulator hearings under Republican majorities.”

Crypto

Lawmakers will continue to scrutinize crypto and its wild price volatility. The lack of investor protections, financial security and stability, and environmental impact of cryptocurrency mining will all be under review.

Both Republicans and Democrats agree—in a rare show of financial services bipartisanship—that stablecoins, a type of cryptocurrency tied to the price of another asset such as the US dollar, need government oversight.

McHenry said on Bloomberg TV that one of his top legislative priorities on the committee will be “giving clarity to the digital asset ecosystem.”

Stablecoins, once a promising crypto sector, experienced a hubris-like crash earlier this year. In May, TerraUSD, a stablecoin tied to the US dollar, collapsed nearly overnight. In November, FTX, a popular cryptocurrency trading platform, collapsed after a liquidity crisis. FTX advisers cited misuse of client funds and lack of oversight.

“FTX.com customers are completely unable to access their funds,” Waters said in a Nov. 10 statement. “Now more than ever, it is clear that there are major consequences when cryptocurrency entities operate without robust federal oversight and protections for customers.”

McHenry emphasized the importance of developing a clear regulatory framework for crypto to protect investors, he said in his own statement.

Waters and McHenry are working on a sweeping bill to limit investor exposure to stablecoin losses, and put guardrails around the emerging industry.

The Digital Assets Working Group of Democratic members, created last year by Waters, is likely to continue its work focusing on cryptocurrency regulation and the possible creation of a US Central Bank Digital Currency. Committee members across the aisle are expected to also continue work on the Task Force on Financial Technology.

Flood Insurance

The elusive legislative goal of the committee—for almost a decade—may finally get done during the next Congress: reauthorizing the National Flood Insurance Program on a long-term basis.

The program is the flood insurance provider for homes and commercial buildings. While property-casualty insurers offer flood coverage, it’s administered through the Federal Emergency Management Agency.

FEMA’s administration of the program requires reauthorization to keep offering flood coverage, but the issue is a political football.

Since 2017, it’s been reauthorized roughly 20 times on a short-term basis. Republicans and Democrats agree it needs long-term reauthorization to keep the market stable and fixes to keep costs low for homeowners amid increased flooding events all over the country.

(Updates to include more details on FTX in the 19th paragraph. An earlier version corrected the type of manufacturers subject to lending restrictions in seventh paragraph)

To contact the reporters on this story: David Hood in Washington at dhood@bloombergindustry.com; Lauren Turenchalk at lturenchalk@bloombergindustry.com

To contact the editors responsible for this story: Naoreen Chowdhury at nchowdhury@bgov.com; Robin Meszoly at rmeszoly@bgov.com