If the year 2022 was about Executive Branch agencies pursuing ESG (environmental, social, and governance)-related activities—from the Securities and Exchange Commission’s GHG and ESG disclosure proposals, to the Department of Labor’s final reversal of the Trump-era rule discouraging ESG-focused investing by pension funds, and the Federal Acquisition Regulatory Council’s proposal to require government contractors to disclose GHG emissions—then 2023 has seen the 118thCongress taking center stage. Policymakers are questioning how ESG issues impact businesses, workers, and investors; and what role the government should play in encouraging or discouraging ESG considerations.
Economic Focus of ESG Oversight
Following the 2022 mid-term elections, Congressional Republicans announced that their oversight agenda would zero in on ESG issues. For example, House Judiciary Committee Ranking Member Jim Jordan (R-OH) sent information request letters on December 6, 2022 – a month before Republicans would take over committee gavels in the House – to Ceres and Climate Action 100+, two organizations that promote investments in clean energy sources and away from fossil fuels. The letters argued that, “[a]t its core, ESG is merely partisan politics masquerading as responsible corporate governance” and that “[c]orporate America’s collusion in pursuit of ESG goals may violate federal or state antitrust laws.”
As 2023 progressed, Congress became increasingly focused on additional ESG issues.
In February, Republicans on the House Financial Services Committee established an “ESG working group” focused on protecting capital markets from ESG considerations through a variety of mechanisms, such as “revamping the proxy voting process, ensuring transparency and accountability of proxy advisory firms, and instituting policies to better align shareholder voting decisions with shareholder economic interests.”
In May, the Republican-led Judiciary Committee sent letters to Ceres and Climate Action 100+ renewing their requests for documents, followed by “subpoenas” to the organizations in June. The House Oversight and Accountability Committee hosted several state attorneys general in the first in a series of ESG-themed oversight hearings that began in May.
In June, the Financial Services Committee’s working group released an interim report outlining “key priorities” “to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans,” such as:
- “Reform the proxy voting system to safeguard the interests of retail investors.”
- “Promote transparency, accountability, and accuracy in the proxy advisory system.”
- “Enhance accountability in shareholder voting by aligning voting decisions with the economic interests of shareholders.”
- “Improve ESG rating agency accountability and transparency to safeguard retail shareholders.”
The same month, the House Oversight and Accountability Committee, joined by Republican Senator Tim Scott, the Ranking Member on the Senate’s Banking, Housing, and Urban Affairs Committee, sent letters to the Chair of the Securities and Exchange Commission and the Secretary of the Treasury about coordination with the European Union on ESG issues and climate disclosure regulations. The House Oversight Committee held a second ESG-themed hearing, focusing on how ESG policies impact markets and consumers.
July proved especially busy with multiple oversight activities. Continuing the theme that ESG investing strategies are anticompetitive and that investment firms that prioritize ESG goals may be engaging in illegal activities, the Judiciary Committee sent document requests in July to Black Rock, Vanguard, and other asset managers requesting information to determine wither they have violated U.S. antitrust laws by entering into collusive agreements to “decarbonize” assets under management and reduce emissions to net zero. The House Oversight Committee Republicans and Senate Banking Committee Ranking Member ratcheted up their efforts to obtain information about the SEC’s interactions with the European Union by requesting transcribed interviews with several current and former SEC officials. The Financial Services Committee also held a hearing that month to examine the SEC’s climate disclosure rule.
Not to be outdone, Senate Democrats have also been conducting oversight and holding hearings on a range of ESG topics, albeit from a markedly different perspective. For example, Senator Bernie Sanders (I-VT), the new Chair of the Senate’s Health, Education, Labor and Pensions Committee threatened a subpoena against the CEO Starbucks, Howard Schultz, to have him testify about the company’s labor practices. The Senate Finance Committee, under Chairman Ron Wyden (D-OR), has sent multiple letters to automobile manufacturers and suppliers requesting information about their supply chains and compliance with the Uyghur Forced Labor Prevention Act of 2021 as part of an investigation into forced labor in China.
Senator Sheldon Whitehouse (D-RI) has been using his position as Chair of the Senate’s Budget Committee to hold a series of hearings investigating the fossil fuel industry and examining the impacts of climate change. In June, the Senate Budget Committee sent a letter to Warren Buffett inquiring why Berkshire Hathaway, unlike other large insurers, “has not taken any steps to restrict its underwriting or investments of fossil fuel projects.”
While it is easy to dismiss this congressional activity as political posturing, the anti-ESG backlash has had some tangible effects—for example, the “greenhushing” trend (i.e., keeping quiet about ESG-related activities), and Black Rock’s recent downplaying of its ESG-focused investing.
ESG-Focused Legislation Faces Uncertain Path
The Congressional focus on ESG issues has not been limited to oversight hearings and document requests. For example, Republicans on the House Financial Services Committee approved four ESG-related bills at a markup in July: (1) H.R. 4790, the Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act, originally sponsored by Rep. Huizenga; (2) H.R. 4767, the Protecting Americans’ Retirement Savings from Politics Act, sponsored by Rep. Steil; (3) H.R. 4655, the Businesses Over Activists Act, sponsored by Rep. Norman; and (4) H.R. 4823, the American Financial Institution Regulator Sovereignty and Transparency (American FIRST) Act, sponsored by Rep. Loudermilk. Each of these bills seeks to ensure that companies are only required to disclose material information, invalidates certain SEC related guidance, and seeks to further clarify and reduce the SEC’s regulatory abilities. Several bills to prohibit the Thrift Savings Plan from considering ESG in investment decisions have been introduced in both the House and the Senate.
What to Expect in the Fall
While Republican-led legislation to rein in the influence of ESG considerations stands little chance of passing the Senate and getting signed into law by President Biden, the GOP’s rhetorical assault against ESG is likely to continue unabated. If anything, the Biden Administration’s regulatory agenda for the rest of the year – with the SEC’s GHG and ESG disclosure expected to be finalized in October, and the FAR Council’s rule in December – will likely keep ESG issues in the headlines and at the center of the Congressional agenda for the foreseeable future.
As the United States continues to debate the merits of ESG policies, including the value increased disclosure about greenhouse gas emissions across industries and supply chains, the European Union is not standing still. The EU has proceeded to finalize its Corporate Sustainability and Reporting Directive (“CSRD”), which will give investors and stakeholders access to information concerning companies’ impacts on people and the environment. And the International Sustainability Standards Board (ISSB) finalized its International Financial Reporting Standards (“IFRS”) IFRS 1 (general sustainability) and IFRS 2 (climate) disclosure frameworks. In tandem, they provide sets of disclosure requirements by which companies must communicate sustainability-related risks and opportunities to investors regarding specific climate-related risks. The influence of EU regulators and their ESG policies on U.S. companies will continue to draw fire from Congressional Republicans. The disconnect between the EU and the U.S. has the potential to create inconsistent—if not outright conflicting—obligations for companies active in both jurisdictions.
Crowell’s ESG team continues to monitor these domestic and international developments and is ready to assist in tracking and evaluating the implications of Congressional and Executive Branch actions.
For further information, please contact:
Elizabeth B. Dawson, Partner, Crowell & Moring