What banks need to watch from the House GOP's anti-ESG month

The bulk of the GOP push against ESG in the House Financial Services Committee centered around proxy voting. 

Republicans argued that a small number of powerful asset managers and activist shareholder companies hold outsized influence in the social policies of some large companies. Lawmakers in the party have floated legislation that would curb the power of those firms, and claim that they are protecting the interests of small retail investors against what they say is the political interest of those large companies.

"Across our country, investors are being held hostage by those who don't want to maximize retirement profits, but rather seek to push a far left social and political agenda," said Rep. Bill Huizenga, R-Mich., Chairman of the Oversight and Investigations Subcommittee on the House Financial Services Committee. "This approach undermines traditional and frankly legal government structures and has turned our financial system into a political battlefield."

Wall Street and Democrats find themselves odd bedfellows in this fight. They argue that environmental concerns are often material to investment decisions (say, for example, an investor wants to mitigate their exposure to increased severe weather events), and that having companies provide data to this end is simply allowing capitalism to work as it should.  

"Twenty years ago, it was more folks on the conservative side that wanted shareholders to be able to make decisions based on something other than earnings per share, and shut up and do whatever the corporate board wants," said Rep. Brad Sherman, D-Calif., during Wednesday's hearing. 

Mostly, this fight concerns non-bank financial firms. The two largest proxy advisory firms — the biggest targets of GOP ire on the topic —  are Glass Lewis and institutional Shareholder Services. 

There's also, however, at least one bank in the crosshairs. State Street is among the three largest asset managers, along with BlackRock and Vanguard, that could come under GOP fire. Last week, the House Judiciary Committee sent a letter to State Street Global Advisors, the bank's asset management division, saying that it could be "potentially violating U.S. antitrust law by entering into agreements to 'decarbonize' its assets under management and reduce emissions to net zero — with potentially harmful effects on Americans' freedom and economic well-being."

The Securities and Exchange Commission, along with its head Gary Gensler, has been a favorite target of Republican lawmakers this Congress, and that's likely to be the focus of next week's House Financial Service Committee hearings. 

"Unfortunately, we have seen a disturbing trend in the Biden Administration's approach to regulating our capital markets—particularly at the Securities and Exchange Commission," said Rep. Patrick McHenry, R-N.C., chairman of the House finance panel, during Wednesday's hearing. "Rather than focusing on sound financial regulation, the SEC has turned its attention towards non-material environmental, social, and political issues. This misguided approach has led to increased costs and burdens for those participating in the U.S. public markets. These politically motivated regulations not only discourage private companies from going public but also hinder the competitiveness of American public companies." 

Banking regulators are also in the crosshairs. The House panel will host two hearings next week, one is specifically about the SEC, and will feature Erik Gerding, director of the corporate finance division. The other will include regulators from the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. 

In the banking regulation hearing, the committee will discuss bills that would require banking regulators to give Congress notice and testimony on request before implementing recommendations made by the Financial Stability Oversight Committee, among other reporting requirements.

Another one of the bills on the bank oversight hearing memorandum would remove the "designation" of one of the members of the Fed's Board of Governors as vice chairman for supervision, a position currently filled by Michael Barr, "to protect Board processes and eliminate mission creep."  If this bill passed, it could have the effect of firing Barr.

At the core of Republicans arguments about both upcoming disclosures required by the Securities and Exchange Commission and those pushed for by proxy advisory firms are "materiality," or, how much environmental concerns could play into financial outcomes. 

Democrats and some financial firms have argued that environmental issues, as well as other ESG concerns like diversity on boards, do correlate to how well a firm or a certain asset performs now, or how it could in the future. 

"The Republican culture war campaign combating ESG and 'woke-ism' comes at a time when climate change is becoming impossible to ignore," said Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee. "I will not mince words: climate change poses a fundamental threat to America's financial ecosystem, its businesses, and to the global economy. It is reckless to insist that climate change is not real and that corporations should not consider the real financial risks associated with climate change." 

Republicans say the opposite, arguing that ESG concerns are more political than financial. 

"I'd like to start by addressing an argument made yesterday by my friends on the other side of the aisle–that Republicans are interfering with free market principles and that any attack on ESG is a threat to capitalism," Huizenga said during a Thursday hearing on oversight of the proxy advisory industry. "That could not be further from the truth. We are holding these hearings to in fact, defend capitalism and keep social policies out of the boardroom. Social policies should be debated in Congress and in state capitals, not arbitrarily decided by third parties." 

This central disagreement between the two parties is what's causing bifurcating policies on the state level, which leaves financial companies struggling to comply with laws that have the polar opposite effect in different states. 

The rhetoric on the national stage echoes that of policymakers who have made substantive changes more locally. For example, Kentucky Attorney General Daniel Cameron opened an investigation in November into ESG initiatives and sought to compel banks to produce documents, communications and information related to their environmental lending practices. And in January, lawmakers in Nebraska introduced legislation to protect against future state treasurers allocating public funds based on perceived political or social agendas.