House Republicans target proxy advisors in latest hearing picking apart ESG investing

WASHINGTON — A Republican-led House Financial Services subcommittee held a second hearing Thursday scrutinizing the Biden administration's environmental, social and governance disclosure proposals for public U.S. companies.

The hearing zeroed in on the influence of proxy advisors on shareholder voting decisions on questions related to ESG investing. Republicans pushed back against what they called the prioritization of ESG shareholder resolutions, while Democrats say shareholders deserve to be informed of all possible risks to their investments.

"Unfortunately, unrestricted shareholder activism is diverting attention and limited resources from core issues, undermining the attractiveness of U.S. markets and discouraging companies from going public," Rep. Ann Wagner, R-Mo., chair of the Subcommittee on Capital Markets, said during opening remarks.

The hearing was the second of six scheduled this month on ESG investing by House Republicans. The GOP has leveraged its new majority power this year to criticize socially conscious investing and Biden administration policies designed to promote it.

Proxy advisors recommend voting decisions on key resolutions before shareholders. They include firms like Glass Lewis — which had a representative appear before the Subcommittee on Oversight and Investigations on Thursday.

The SEC adopted rule amendments in 2021 that aimed to make it easier for advisory firms to offer advice to shareholders.

Wagner said the proxy process should be reformed to ensure shareholder proposals align with company interests. She also denounced the Securities and Exchange Commission's 2022 proposal to require public companies to make more disclosures related to environmental, social and governance factors, reiterating criticism made during a full committee hearing Wednesday.

Out of 13 pieces of legislation the subcommittee is considering, seven target the SEC.

"Congress has not granted the SEC the authority to create regulations that compel companies to disclose general information about ESG-related issues," she said.

The GOP's push against policies designed to promote ESG investing has garnered the support of some of the largest business advocacy groups, such as the Business Roundtable and the National Association of Manufacturers. The Business Roundtable said it has challenged the SEC led by Chair Gary Gensler in court for rolling back proxy advisory reforms established during the Trump administration.

Chris Netram, managing vice president of tax and domestic economic policy for NAM, contended that the SEC has enabled a "parade of activist groups and proxy advisory firms" to divert shareholder votes away from core company interests.

"In fact, the SEC over the past two years has taken proactive steps to support and empower these third-party actors—rescinding much-needed guardrails, limiting companies' ability to exclude activist proposals from the proxy ballot and encouraging environmental, social and governance agendas unrelated to long-term business growth and shareholder returns," Netram said in pre-released testimony.

Democrats, led by Rep. Maxine Waters, ranking member of the Financial Services Committee, are countering Republicans' monthlong assault on ESG regulations.

"Today, Republicans are giving the term 'investor protection' new meaning by pushing legislation that would protect investors from their own ideas," Waters said during the hearing. "For a party that supposedly values free speech and free market capitalism, they are now trying to muzzle the ability of shareholders to bring forth proposals that can influence the direction of the companies they own."

Nell Minow, vice chair of proxy firm ValueEdge Advisors, argued that the fossil fuel industry is the biggest opponent of companies making climate-related ESG disclosures.

"(It's) no secret that it's the fossil fuel industry that is against these questions," Minow said. "Everybody else is for them. I haven't noticed anybody come up with a single example of some ESG proposal or ESG vote that was somehow detrimental to anybody."'

During questioning, Rep. Sean Casten, D-Ill., emphasized the need for required reporting to meet the demand for climate-related information and said a majority of investors support climate disclosures as material information that could alter voting decisions.

"This debate is settled. There is no question about whether climate disclosures are material unless you think that there are people on this committee who know better than free markets, who know better than the interests of investors," Casten said.

"I am sorry it has become partisan to look out for the interests of investors," he added.