Republicans are expected to crack down on environmental and socially conscious investing, known as ESG, when they retake the House next year.
ESG, which stands for environmental, social and governance investing, is a broad term for attempts to invest ethically, and can include actions by the government, investment firms and banks or individuals.
For example, the Biden administration recently put forward a regulation that enables money managers to consider “the economic effects of climate change” in investments that they oversee. Separately, the Securities and Exchange Commission (SEC) proposed requiring publicly traded companies to disclose how much they contribute to climate change.
ESG can also include decisions by investment firms, banks or individuals to steer money away from companies whose practices or products they consider unethical or bad for the environment.
Proponents of ESG see it as a way for people to help themselves do well financially by investing money into companies seen as having a positive impact, or that meet a set of environmental and social standards.
Republicans argue that ESG could harm the fossil fuel industry, and that the government should not be providing incentives to foster it. The burning of fossil fuels is the main driver of climate change, so entities operating under this philosophy may not put as much money into this industry as they would have otherwise.
Republicans have also raised concerns that money managers who take these factors into account may do so at the expense of profits for their clients.
Patrick McHenry (N.C.), the top Republican on the House Financial Services Committee, told The Hill in a statement that committee Republicans will “work together to conduct appropriate oversight of activist regulators and market participants who have an outsized impact.”
He specifically called out a proposed SEC regulation that would require companies to disclose their emissions and the risks that climate change poses to their business.
“This is contradictory to established law that already requires companies to disclose information if it is material to investors,” McHenry said.
Proponents of the SEC proposal have argued that the rule will help investors understand the complex impacts that climate change could have on financial markets.
Earlier this year, Republicans on the House Oversight Committee also took aim at this rule.
In the minority, the GOP had little ability to do much about ESG, but the House majority will give them a more powerful platform.
House GOP lawmakers will have oversight authority through which they can request or in some cases subpoena documents and conduct hearings on a wide range of topics they hope to examine.
ESG is likely to be a focus, given broad Republican condemnation of the investing practice.
Joseph Brazauskas, former counsel on the House Oversight and Reform Committee, said that he would expect that the party will take a close look at ESG even as they also focus on other initiatives,
“They’ve got a big staff over there and they’re obviously working on a lot of different issues,” Brazauskas said of the House Oversight Committee.
The Financial Services Committee is also expected to play a big role.
And at the state level, Republicans are also putting their sights on ESG.
Earlier this month, the state of Florida said it would pull $2 billion that was being managed by the firm BlackRock over the issue, calling the company’s position on ESG “undemocratic.” BlackRock argued that it was actually Florida that was putting politics ahead of finances “given the strong returns BlackRock has delivered to Florida taxpayers.”
A 2021 meta-analysis from New York University found ESG to be generally associated with better financial performance for stock holders.
In Congress, Sen. Mike Braun (R-Ind.) and Rep. Andy Barr (R-Ky.) are attempting to repeal a Biden administration rule that eased restrictions on considering ESG factors when firms manage retirement investments.
While the specific effort is unlikely to pass through the divided Senate, Barr told The Hill that he and his colleagues on the House Financial Services Committee are likely to take a hard look at the issue.
“Environmental, social, and governance represents everything that is wrong with woke capitalism,” he said in a statement. “ESG is cancer to our capital markets and will receive serious oversight scrutiny from me and my House Financial Services Committee colleagues in the 118th Congress.”
Barr’s office also said that the congressman plans on “expanding on” a bill he introduced that would specify that investment advisers can only take monetary factors into account. The office declined to elaborate.
Meanwhile, Republicans on the House Judiciary Committee made antitrust arguments about ESG investing, signaling another potential line of inquiry.
Brazauskas, who now represents energy clients at law firm Bracewell LLP, said that such investigations typically begin with the government, but could later extend to actors in the private sector.
“Sending letters to the private sector and backed up by subpoena authority you tend to get information and documents a lot quicker than you do from the federal government,” he said. “There’s always the possibility that private entities will be wrapped up in any sort of oversight.”
Some environment and ESG advocates told The Hill, meanwhile, that they see the Republican attacks on the investing practice as the latest battleground in the ongoing and highly partisan battle over climate change.
Jessye Waxman, a senior campaign representative with the Sierra Club’s Fossil-Free Finance campaign, said she sees the situation as “those who are in the pockets of fossil fuel interests” pushing back against “the inevitable low-carbon transition.”
Waxman said that so far, GOP pushback has had “more of a chilling effect than we might have anticipated,” citing examples like Vanguard’s recent exit from an industry climate initiative.
Vanguard said at the time that it made the move to clarify that the company “speaks independently on matters of importance to our investors,” among other reasons.
Yet Waxman noted that financial markets are global and said overall she believes the financial sector is making climate progress.
“Even with this backlash, financial institutions are still moving forward, even in the United States,” she said.