Conservatives shouldn’t shy away from anti-ESG legislation, even in a divided Congress.
Conservatives shouldn’t shy away from anti-ESG legislation, even in a divided Congress.
P oliticized finance — and the government’s role in it — is going to be a bigger issue than ever in 2023, and both institutional and individual retail investors could be in for some major surprises. Legislative proposals at the federal level will be taking aim at environmental, social, and governance (ESG) investing policies, in a backlash that has only accelerated since a year ago.
Advocates advertise ESG as simply a smarter, more holistic, and more sustainable way to invest, but more and more people on the right have caught on and are beginning to understand that in practice, ESG functions to smuggle progressive policy goals into ostensibly nonpolitical corporate decisions. Whether it calls for an end to fossil fuels, diversity-hiring mandates, support of abortion or boycotting Israel, you’d be hard-pressed to find an ESG goal that doesn’t fit neatly into a House Progressive Caucus policy memo. Because of that, several Republicans in Congress have recently made ESG a top issue, including members of the House Financial Services Committee, now chaired by Representative Patrick McHenry (R., N.C.).
Even in a divided Congress in which House Republicans can expect little cooperation from the Democrat-controlled Senate, having the Financial Services gavel switch hands from Maxine Waters (D., Calif.) to McHenry is a dramatic change. McHenry has already made clear that he will be calling Securities and Exchange Commission chairman Gary Gensler to testify on the agency’s ESG initiatives, in particular the jaw-droppingly expensive and invasive climate-disclosure rule that it is currently finalizing. Less discussed, but no less likely to be a source of interest to the committee, is the SEC’s planned “human-capital management” rule, which could mandate every public company in America to collect and disclose the demographic information (race, sex, ethnicity, sexual orientation, and gender identity) of every employee. A “self-regulatory” rule adopted by NASDAQ and approved by the SEC in 2021 already requires such disclosures in the context of boards of directors.
Besides seeing Chairman Gensler grilled before the full Financial Services Committee, or at least Bill Huizenga’s (R., Mich.) Subcommittee on Oversight and Investigations, we should expect several ESG-related bills to be filed in this session of Congress. Some will be reintroduced versions that dropped in the 117th Congress but understandably didn’t go very far under Speaker Pelosi. Huizenga, for example, will likely reintroduce both the Index Act and Mandatory Materiality Requirement Act. Originally co-sponsored by fellow Financial Services Committee member Blaine Luetkemeyer (R., Mo.), the Index Act would require asset managers to vote on shareholder resolutions in accordance with the instructions of fund investors rather than at their own discretion. Meanwhile, the Mandatory Materiality Requirement Act, co-sponsored in 2022 by Andy Barr (R., Ky.), would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to establish a statutory definition of “materiality” to guide SEC rulemaking, thus limiting the creative reimagining of what constitutes a material disclosure that ESG advocates have been promoting.
Other efforts from last year that we might see return to prominence in 2023 include the ESG Rule Prevention Act from Byron Donalds (R., Fla.), a noted ESG skeptic, as well as more narrowly tailored efforts to block the SEC’s policy agenda such as the Stopping Excessive Climate Reporting Act from Beth Van Duyne (R., Texas). Donalds’s effort would stop the federal government from using greenhouse-gas reporting as a requirement for procuring federal contracts — a common gambit when the federal government wants to achieve a given outcome in the economy but stops short of creating a hard mandate. Representative Van Duyne’s bill would simply stop the SEC from following through on its pending climate-disclosure rule, walling off the agency from using its authority under the 1934 Securities Exchange Act to require greenhouse-gas-emissions disclosure. The top players on the issue in the Republican caucus are now also poised to collaborate via the recently announced ESG Working Group, which is chaired by Huizenga and will include Donalds and others.
As with any bills supported by a Republican House, these efforts will likely face a frosty reception from Chuck Schumer and company. But that’s not the end of the story. There’s a long history of Democrats, especially ones with a lot of blue-collar constituents, opposing environmental policy that would threaten American jobs. Former Energy and Commerce Committee chairman John Dingell (D., Mich), for instance, was famously anathema to many green activists — who derisively nicknamed him “Tailpipe Johnny” for opposing legislation that he rightly predicted would have put many of his Detroit-area auto-worker constituents out jobs. We see a similar dynamic today with Senator Joe Manchin (D., W.Va.). He wrote to Chairman Gensler last April saying that he was “deeply concerned” about the SEC’s climate-disclosure rule and just last week announced that he was joining 48 Republican senators in opposing the Department of Labor’s rule to allow pension-fund managers to incorporate non-financial ESG factors into their investment decisions.
Democrats, big finance firms, and progressive activist groups are already working on their own counter-attack, attempting to depict ESG skeptics as Neanderthal deplorables who love pollution and all-white workforces. But there’s reason to think that their usual playbook will fail them on this issue. In the past, conservatives and libertarians who have stood up for free markets and limited government have been stereotyped as big-business apologists who are doing the bidding of corporate plutocrats. But in the present case — especially when it comes to big asset managers using ESG criteria to make investment decisions — the optics are reversed. The ESG skeptics are the ones trying to defend the retirement savings of regular Americans, while the ESG advocates are the ones defending trillion-dollar money managers such as BlackRock.
Republicans in Congress want to support U.S. jobs while the Biden administration and Senate Democrats want to kill off America’s domestic oil and gas industry and let Saudi Arabia and Venezuela collect the spoils. Who do you think will win that debate?