Congress Adds Fuel to Anti-ESG Fire

The joint resolution, which President Joe Biden has said he will veto, increases the heat in the U.S. on ESG investing, and asset managers see risks.

Congress passed House Joint Resolution 30 on Wednesday, which would nullify the Department of Labor’s rule from November 2022 that permits the use of environmental, social and governance investment strategy in retirement plans.

The resolution passed the House 216 to 204 on Tuesday and the Senate 50 to 46 on Wednesday. Senators Joe Manchin, D-West Virginia, and Jon Tester, D-Montana, were the only Senate Democrats to vote in favor. The measure was initially proposed by Representative Andy Barr, R-Kentucky, an opponent of ESG.

The rule in question was finalized by the administration of President Joe Biden. On Monday, prior to the votes, the White House said Biden will veto the measure. He has 10 days from March 1 to either sign or veto.

Even before the Congressional vote, asset management firms began disclosing that increasing opposition to ESG in the U.S., in particular from state officials, could present a risk to their business.

A review of annual Form 10-K disclosures made to the Securities and Exchange Commission by major investment manager companies shows that several firms explicitly listed anti-ESG policies as a material regulatory and reputational risk to their businesses. ESG, a strategy often intended to manage certain types of risk, has become a potential source of risk itself, the disclosures show.

State Street Corp., parent of State Street Global Advisors, for example, said in its disclosures that, “Our businesses may be adversely affected by increased political and regulatory scrutiny of ESG investing practices.” Recent legislation at the federal and state level, as well as recent litigation challenging the same DOL regulation, make ESG investing a riskier proposition.

“Fiduciary, anti-competitive, voting power, governance, and other concerns with ESG investment strategies continue to be the subject of legislative and regulatory debate globally, particularly at the federal and state level in the United States, the outcomes of which could impact both our asset management business and the clients that we service,” the bank wrote in its 10-K filing.

The legislation also has the effect of signaling future intentions: If Republicans capture both Congress and the White House in 2024 elections, then the GOP could pass a bill of this kind with a more cooperative president, something for which firms with ESG exposure must prepare.

The regulatory risk was also disclosed by firms such as BlackRock and Ares Management Corporation. Ares wrote in its 10-K that, “If investors subject to such legislation viewed our funds or ESG practices, including our climate-related goals and commitments, as being in contradiction of such ‘anti-ESG’ policies, legislation or legal opinions, such investors may not invest in our funds.”

Apart from regulatory risk, investment firms also expressed concern about reputational risk. The 10-K report for TPG Inc. read, “We are subject to increasing scrutiny from fund investors and regulators on ESG matters, which may constrain investment opportunities for our funds and negatively impact our ability to raise capital from such investors.”

State Street expressed the same concern in more vivid terms: “Views on ESG practices, particularly those related to climate issues, have also become political issues, which can amplify the reputational risks associated with such allegations.” The firm continued: “Political pressure may also be placed upon governmental clients not to use service providers, such as us, if the legislators or governmental officials in such jurisdictions believe our ESG-related positions are not consistent with the views of such legislators or officials.”

Though the bill is most likely to be vetoed, it is part of a growing pattern of hostility and skepticism toward ESG from politicians, mostly members of the Republican Party.







Tags: , , , , , ,