Over the past week, House Republicans have said they plan to vote on a suite of bills by July aimed at undermining those who track environmental, social and governance-risk factors as part of their investment process. House Financial Services Committee Chairman Patrick McHenry of North Carolina picked Michigan’s Bill Huizenga on Friday to head a working group focused on investigating and reining in ESG.
In a note, McHenry said he wants his committee to “establish clear rules of the road” to “end the politicization of our financial system.” He also called on members to pursue “rigorous oversight of the Biden administration.”
With the Senate and White House in Democratic hands, any GOP legislation is almost undoubtedly dead on arrival. While the effort can thus be seen as an attempt to mollify the party’s Big Oil donors and motivate its far-right base, that doesn’t mean the negative attention won’t have concrete effects on investors and markets.
“We see ongoing headline risk for asset managers and lending institutions” from all the ESG backlash, said John Miller, an analyst at Cowen Inc.’s Washington Research Group. “The messaging from the Republicans and Democrats will evolve into the 2024 election cycle. We see few off-ramps.”
He separated the GOP’s anti-ESG messaging into four buckets:
- Materiality: Climate and social risks are political and pose little financial and material risks.
- Proxy voting: Third-party shareholder advisory firms are biased towards progressive agendas so their role should be significantly reduced.
- Antitrust: Investor-led collaboration on sustainability issues leads to collusion by fixing prices and limiting consumer options.
- Fossil fuels: ESG investors want to defund targeted industries by closing off access to capital.
The strategy is helped by the fact that most ESG-focused stock indexes underperformed in 2022. MSCI Inc., a leading creator of widely tracked market benchmarks, said its ACWI ESG indexes trailed because of “higher oil prices and the associated outperformance of the energy sector.”
Net inflows to ESG-labeled exchange-traded funds dropped to about $2.9 billion in 2022 from a record $36 billion in 2021, data compiled by Bloomberg show.
The problem with viewing that data in a vacuum, however, is that the decline in investment occurred during a year when markets suffered their biggest losses since the 2008 financial crisis.
The Republican to watch on Capitol Hill is McHenry, Miller said. He’s “the key player, and his willingness to dig in on ESG, or not, will dictate air time on these topics.”
One rule that’s already under attack is the Biden administration’s decision in November to allow pension plan fiduciaries to consider the climate crisis and other ESG-related factors when they make investment decisions, including voting on shareholder resolutions and board nominations.
Senator Joe Manchin, the Democrat from West Virginia who (along with Kyrsten Sinema of Arizona) spent the past two years often voting with Republicans against Biden’s agenda, said he plans to join the GOP again, this time in backing a resolution to overturn the pension rule. Manchin, who represents a coal state and has significant interests in the fossil-fuel industry, contends the rule jeopardizes “retirement savings for more than 150 million Americans for purely political purposes.”
The attack on ESG shouldn’t be seen as new, Miller said, but instead “an extension of longstanding party positions, including conservative views on social issues and climate-change risks.” And it’s going to continue.
“We see little room for a scale-down,” he said. “Democrats and Republicans are speaking past one another.”