A Republican congressional committee escalated its campaign against sustainable investing on Tuesday.
The GOP heads of two major House subcommittees sought to cast investing that considers factors like climate or human rights as an insidious attempt to “rewire the fabric of America,” in the words of Rep. Pat Fallon (R-Texas), chairman of the Oversight Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs.
Proponents of Environmental, Social and Governance (ESG) investing offer only “woke” policies that deliver nothing but higher prices, fewer market choices, and cultural oppression” and jeopardize investment returns for retirees and other investors, Fallon said in a statement.
Without control of the Senate, formal Republican anti-ESG initiatives are unlikely to pass — especially with President Biden lkely to veto them. And Democrats argued that the hearing was old news.
“Once again, we sit here in this hearing room, wasting our time, our constituents’ time and the nation’s time on a Republican manufactured crisis,” said Rep. Shontel Brown (D-Ohio)
Rep. Katie Porter (D-Calif.) was even more blunt. “I can’t believe this is part two [of the ESG hearings],” she said. “Part one was actually the stupidest hearing I’ve ever been to. And now we’re having part two.”
“Please God,” she added, “let there not be a part three.”
Republicans see the campaign as being good politics, and it has been successful in scaring many big banks and asset managers into watering down their climate commitments, as Bloomberg has reported.
For the last two years, the GOP has focused on the use of ESG factors of asset managers, the third-party financial institutions that hold — and decide how to invest — trillions of dollars in Americans’ money. Republicans argue that while anyone should be allowed to invest according to their beliefs, these money managers should not be allowed to make those decisions on their clients’ behalf.
In particular, Republicans don’t want those big investors — particularly big banks like BlackRock and State Street — to require the companies they invest in to disclose information like their carbon emissions.
“Due to Democrats’ ESG push, asset managers are prioritizing ESG goals over profit and risking Americans’ hard earned money,” Fallon told the committee.
Republicans were at pains to argue that this was not — as Democrats claimed — an attack on economic freedom, long a core rhetorical touchstone of the party.
“Republicans aren’t demonizing ESG — it’s a free country. If you want to invest in ESG, invest in ESG,” said Rep. Lisa McClain (R-Mich.), chair of the Subcommittee on Health Care and Financial Services.
But McClain and other GOP members argued that money managers should not make those decisions with the funds that have been entrusted for them.
Democrats have argued that without mandatory ESG disclosure, it is impossible for investors to make the sort of decisions that Republicans insist they should still be allowed to make.
Porter gave the analogy of what it would be like to shop at a car dealership run on the ‘price-only’ principles pushed by Republicans.
“I walk into a dealership in a state that has banned showing consumers any data or information other than financial info — so they had to cover up all the cars.”
In this example, this hypothetical customer — who has come in looking for a minivan that is fuel efficient, made in America and isn’t “country blue” — finds it limits her economic freedom.
“I can’t see the color, the fuel efficiency, whether it was made in America, because — those are not directly related to its value,” Porter said.
In the end, Porter said, she might buy based just on price and depreciation schedule, only to end up with a three-row SUV “in a color I hate.”
GOP donors have played a significant role in escalating the anti-ESG push.
Florida’s far-reaching ESG ban was inspired by the failure to secure loans by a private prison company that was a major donor to Florida Gov. Ron Desantis, who is now a GOP presidential candidate.
That law, like many others passed by conservative state legislatures, relied on the notion that ESG is a form of “discrimination” against conservative beliefs. That is a line of argument that was pioneered and pushed by the fossil fuel industry.
Republicans have long argued that ESG concerns represent an attempt by outsiders to use markets to push a liberal political agenda — though they differed on which outsiders had authored that agenda.
For example, McLain, the committee chair, said that America was “seeing more and more instances of woke corporations importing European values.”
Jason Isaac of the Texas Public Policy Foundation, by contrast, testified that “it does very little to help Americans and does everything to help the Chinese Communist Party.”
Republican witnesses decried the effects of “wokeness.” Mandy Gunasekara of the Independent Women’s Forum, a GOP witness, in her published remarks said ESG aimed to “promot[e] “gender transitions” in children.
“I want to know: do you really believe that garbage?” Rep. Becca Balint (D-Vt.) — who had just stepped in from a hearing about access to gender affirming care — asked Gunasekara.
“It’s not about belief,” Gunasekara said. “It’s a matter of fact.”
In the previous hearing, Balint said, parents of transgender children asked her that “the next time you’re in a room with someone bringing up our children and our families as some kind of bogeyman, that you will actually stand up for us.”
The chance, Balint said, had come sooner than she expected: “I didn’t think it would take less than half an hour. I left that hearing and here I am with such an opportunity.”
Republicans also argued that ESG considerations have led to decreased U.S. oil production, higher prices and lower pension returns. But Columbia University accounting professor Shivaram Rajgopal argued that the clamor around ESG had primarily come from the financial sector itself, not from activists or politicians.
“ESG, in essence, is a free market, organic, investor-driven movement, to ask firms to disclose information about the factors associated with their future cash flows or cost of capital,” he said.
Investors “would be derelict of their fiduciary responsibility if they did not consider the material factors while making an investment decision,” Rajgopal added.
The two sides argued whether consideration of ESG factors lead to reduced returns. But Rajgopal, the Columbia business professor, argued that this was the wrong question. ESG, he said, wasn’t as much about maximizing year-to-year performance as avoiding rare — but catastrophic — risks.
In the early-2000s Enron collapse, for example, failures in corporate governance — the ‘G’ of ESG — wiped out the entire value of the company.
Considering ESG factors, Rajgopal said, insulated investors from future catastrophes, from the destruction of a company’s business model or physical assets by climate change, to the corrosive impacts that come from favoring lobbying over research and development.
“The current reporting disclosure model is, in my mind woefully inadequate,” Rajgopal said.
Markets, he added, “can’t be efficient if you stop access to data.”