Republican-led FSC attempts to crack down on ESG

July 18, 2023

The US congressional Financial Services Committee has begun investigating the rules that govern proxy voting, the processes through which activists apply pressure to public companies to adopt ESG goals.

In a series of hearings across its July ‘ESG month’, the committee, chaired by Republican Patrick McHenry, has begun discussions on how ESG impacts insurance, housing, financial regulations and the influence of the proxy advisor industry.

House Republicans have become increasingly strident in their criticism of ESG, which enjoys firm support from their Democrat peers.

In opening remarks on 14 July, FSC Vice Chair Rep. Monica De La Cruz, Republican Congresswoman from Texas, said: “ESG is a form of virtue signaling where companies can proclaim how enlightened they are based on their environmental, social, or corporate governance actions, even if they had to ignore their fiduciary duty to their shareholders or decrease the value of their goods and services to consumers.”

The FSC hearings will culminate with votes on a number of bills, including legislation on excluding shareholder proposals based on ESG criteria and tighten the regulation of proxy advisor services.

In the memorandum for the hearing on insurance and housing, the committee highlighted how ESG mandates “increase cost and limit the availability” of insurance and housing, citing regulation around zoning requirements as “exclusionary”.

It describes ESG disclosure requirements for insurance companies as activists seeking “to capitalize on the reputational risks of insurers.”

Among the new legislation set to be voted on at the end of the month is a bill to authorize the exclusion of shareholder proposals from proxy or consent solicitation material if the subject matter of the shareholder proposal is environmental, social, or political.

The FSC is also seeking to study the influence of Institutional Shareholder Services (ISS) and Glass Lewis. The two proxy advisors control 97% of the market, according to research by Stanford University. The committee said the advisors’ “dominance” over the industry “raises questions about bias, accountability, and oversight”.

In response to De La Cruz’s opening statement, ranking Democratic member of the House FSC Maxine Waters hosted a roundtable titled ‘Combatting the MAGA Attack: Protecting Environmental, Social, and Governance Policy in Financial Services’.

At this event, Waters said: “The Republican culture war campaign, combating ESG and quote "wokeism”, comes at a time when climate change is becoming impossible to ignore. I will not mince words. Climate change poses a fundamental threat to America's financial ecosystem, it's businesses and to the global economy.”