5 things to know about the growing fight over ESG

Democrats and Republicans attacked each other as opponents of free markets in a contentious hearing Wednesday concerning proposals that would require companies to disclose climate-related information.

The hearing marked the beginning of a series that will be held by the GOP-controlled House Financial Services Committee taking aim at environmental, social and governance (ESG) investing.

The once-arcane financial philosophy, which is built on the idea that investors have a right to information about companies beyond the strictly financial due to the impact other factors can have on business, has increasingly come under fire from Republicans.

Since the party assumed control of the House in January, GOP-led committees have held repeated hearings attacking ESG investing.

The target of Wednesday’s hearing was the federal government — specifically, financial regulations proposed by the Biden administration that seek to facilitate ESG investors by requiring companies to disclose information related to a company’s impacts on climate change, as well as the risks it faces from extreme weather.

While none of these bills are likely to make it through a Democratic-controlled Senate, the hearings served to advertise the GOP’s priorities should it retake control of the upper chamber — or the presidency.

Here are five things to know about the fight over ESG. 

Both sides attacked each other as “anti-capitalist”

At an event following the hearings, Rep. Sean Casten (D-Ill.) said the GOP wants to ignore popular demands for climate action “because I’ve got this industry, which is unable to compete in a competitive market. And I want to force you to put your capital there.”

“That’s not free markets. That ain’t capitalism. That is stupidity,” he added, noting the argument was particularly ironic coming from “the party of Ronald Reagan.”

And Rep. Brad Sherman (D-Calif.) repeatedly compared Republican attacks on ESG to the Socialist Workers Party of Communist revolutionary Leon Trotsky, who sought to overthrow the global capitalist system.

Rep. Pete Sessions (R-Texas) countered such arguments during Wednesday’s hearing by contending that regulations facilitating ESG investing would themselves be anti-capitalist. 

“I find it very interesting that we were accused in the very beginning of this hearing of driving a political agenda,” Sessions said.

“We know who the political agenda is because free markets like to make their own decisions. And people who are investors like to invest in what will gain them what they’re after. And when it’s driven by the government, I think we make a mistake.”

But Democrats argued that anti-ESG rules made it functionally impossible for environmentally conscious investors to invest according to their values.

Without rigorous disclosure of ESG information, “I don’t know how you can make a decision about an investment if you don’t have that information,” said Keith Ellison, a former committee member turned Minnesota attorney general who was called as a witness by the Democrats.

Republicans focused their attacks on the federal government 

At past anti-ESG hearings held by the party, GOP lawmakers have often focused their ire on corporate asset managers like BlackRock and State Street — third-party investors who manage trillions of dollars in index and pension funds and have been principal proponents of ESG disclosures.

But at Wednesday’s hearing, Republicans and the experts they called kept circling back to their principal target: federal financial regulators at agencies like the Securities and Exchange Commission (SEC), Federal Reserve and the Office of the Comptroller of the Currency.

These agencies’ policies requiring climate disclosures are the real threat, said witness Benjamin Zycher of the right-wing American Enterprise Institute.

“I urge Congress not to focus on the large asset managers — however silly their public pronouncements,” Zycher said. 

“I urge Congress instead to reform the SEC regulatory framework I urge Congress to enact legislation restraining the efforts of regulatory agencies to pursue climate policies not authorized in the law — and justified on the basis of fundamentally dishonest benefit cost analysis.”

GOP lawmakers repeatedly insisted they were not opposed to ESG investing — but that any climate disclosures should be voluntary, not required. Democrats argued that voluntary disclosure policies were inconsistent, unreliable and hard for investors to use — and that national-level financial rules proposed by federal regulators were the only way to generate rigorous data.

Devolving the responsibility of setting such rules to the states would create a “race to the bottom,” Sherman said.

The California representative noted that this wasn’t only a problem for environmental factors — the ‘E’ of ESG — but for the control of corporate boards by their shareholders. (That “governance” factor is part of the G of ESG.)

The California representative outlined a system in which a company’s board goes to the tax haven state of Delaware, “and they’ll agree to pay some fees as long as [state regulators] give them rules to make it clear that shareholders can’t tell the board what to do. And then if Delaware won’t do that, you go to Wyoming, and if they won’t you go to North Dakota.”

“If we’re going to have shareholder democracy,” he concluded, “it has to be protected by the SEC.”

The fight hinges on an argument about costs 

Republicans argued that consideration of any non-financial factors — like a company’s exposure to climate risk — by third-party asset managers handling pension funds is inherently at odds with what they say should be a financial firm’s top priority: yielding maximum returns for shareholders. 

On Wednesday, GOP lawmakers homed in on a proposed rule from the SEC that would require businesses to report their carbon emissions — though to what extent remains unclear — as well as the climate risks they face.

For Republicans, this was anathema. 

“This misguided approach has … increased costs and burdens for those participating in U.S. public markets,” Financial Services Committee Chairman Patrick McHenry (R-N.C.) said in Wednesday’s hearing.

“These politically motivated regulations not only discourage private companies from going public, but also hinder the competitiveness of American public companies.” 

But Democrats said this accounting of costs missed the bigger impacts of the climate and social issues ESG investing considers. 

Rep. Stephen Lynch (D-Mass.) argued that if ESG had been invented in the 1990s, it could have spared America the de-industrialization caused by offshoring of industry.

“Maybe it is cheaper — and it can raise up your bottom line — to use our 13-year-old to clean the killing floors in your slaughterhouse,” he said.

“But maybe that is so outside of our values and something we won’t do that just to make some more bucks. I think these things are to be considered, should be factored in.”

Ellison, meanwhile, argued that Republicans’ view of cost left out the impact of climate disasters, which scientific consensus shows are made more likely and more severe by the rising levels of greenhouse gases dumped into the atmosphere through the burning of fossil fuels.

Republicans contend ESG would do little to help the climate

Republicans and Democrats clashed over whether the climate disclosure requirements that ESG investors demand would benefit the U.S. — or impact the climate.

“The climate effects are literally zero,” said Zycher of the conservative American Enterprise Institute.

A single firm’s emissions “cannot possibly have measurable climate effects and thus would have no impacts on prospective returns on investments,” he said.

Democrats countered that considering ESG factors — which the disclosure rules would facilitate — translates to better returns for investors and that investors are asking for this material to help avoid risk.

“ESG is data,” Ellison said, “and data shows a positive correlation between ESG principles and returns on equity.” 

The Minnesota attorney general charged that the campaign against ESG and climate disclosure was a rear-guard action in defense of “one industry in particular, the fossil fuel industry, that bears so much responsibility for costs of climate change, and has waged a decades-long campaign of deception to deflect [climate action].”

In the arguments over the disclosure rule, lawmakers and experts from the two parties were separated by a yawning gap over their belief in the benefits of the broader Biden administration climate policy, of which its backing of ESG disclosure rules is one aspect.

The administration has advocated that the country reach “net zero” — a state in which carbon emissions are balanced by carbon pulled from the atmosphere — by 2050.

On a global scale, this is a conservative position in that the U.K. Conservative Party was the first national legislature to pass such a policy, and it’s one that many climate groups are skeptical of, characterizing it as a potential excuse for delaying necessary action for decades. (A recent report by two analysts at the London School of Economics suggest that the Tory-led U.K. is doing just that.)

Republicans argued that this effort was, in a word, worthless.

“The Biden administration’s net-zero proposal would — using the EPA climate model — reduce global temperatures near 2100 by 0.17 percent,” Zycher said.

That number comes from a report released Monday by the right-wing Texas Public Policy Foundation (TPPF), which sought to calculate the impacts on the climate if the United States moves off carbon by 2050 — and the rest of the world does not.

But the TPPF scenario is one that climate scientists see as implausible, because they say climate action will either involve a global effort — or a global refusal to make one. “It’s not a good faith argument because it buys into the single-actor fallacy — the notion that any one nation can solve on its own a problem that requires international cooperation,” University of Pennsylvania climate scientist Michael Mann told The Hill.

The U.S.’s role as the largest historical contributor to climate change makes it easier for the rest of the world not to act if it does not take the lead, he said. “If the U.S. fails to lead here, then other nations who have less of a legacy in having contributed to the problem have an excuse for inaction themselves.”

Texas Public Policy Foundation President Jason Isaac, however, dismissed the idea that there was any broader benefit to America leading on ESG, or on climate in general.

“Why us?” he asked. “We did more about this than anybody else in the other direction. We’re a world leader in environmental protection and we’re a world leader in clean air. We’ve done more on environmental leadership than anyone else.”

The anti-ESG campaign is having an effect — though not on federal legislation

With control of Congress divided, the Republican campaign against climate disclosures is unlikely to lead to any near-term legislation. 

But it’s having other impacts, proponents argue. 

The broader campaign by state legislatures and attorneys general — not to mention the House — has pushed many large Wall Street banks to quietly retreat from a leading climate coalition, the Glasgow Financial Alliance for Net Zero.

For many big Wall Street banks, the American right’s attack on ESG has gotten sufficiently severe to constitute a risk in its own right, The Financial Times reported — and one that is sufficiently serious that they now feel obligated to disclose it to investors.

The fear of being sued over “energy discrimination” is making ESG “a four-letter word” in the financial industry, Isaac of TPPF told The Hill. 

“Some are reversing their positions, which I think is great,” he added.