House Republicans Call for More Transparency in ESG and Proxy Voting

An “ESG Working Group” established by Republicans on the House Committee on Financial Services in February, published an interim report, June 23, highlighting the various policy goals it intends to pursue. These include: regulating proxy voting and environmental, social and governance rating firms, mitigating application of European Union regulations to U.S. issuers, and blocking the Securities and Exchange Commission’s climate disclosure proposal.

The report indicates that the group is primarily interested in the “E” for environmental in the ESG moniker, a focus that is reflected in the lawsuits brought by fossil fuel industry groups seeking to overturn the Department of Labor’s Employee Benefits Security Administration’s rule proposal permitting ESG factors to be used by fiduciaries making retirement plan investment decisions: “The initial focus of the Working Group centers on the environmental aspect, specifically the current promotion of environmental policies in the financial services industry and by regulatory bodies.”

To that end, the group recommended reforms to the proxy voting industry. They identify the two largest proxy voting firms, Glass Lewis and Institutional Shareholder Services Inc., which is the parent company of PLANSPONSOR. The House group states that proxy voting firms need to be more accountable and transparent to shareholders, including being required to publish their methodologies and data regularly and only considering pecuniary factors in making their voting recommendations. Additionally, the report says  proxy voting firms should be required to disclose whether any of the proposals on which they are offering a voting recommendation was submitted by a client, so as to reduce conflicts of interest.

The report makes broadly similar recommendations for ESG ratings firms (ISS also provides ESG ratings). The House members write that firms selling ESG ratings should disclose their methodologies and data used in assigning the ratings.

The group also identifies the volume and content of some shareholder proposals as a problem. They argue that shareholders submit too many politically motivated proposals that consume time and resources for issuers. They state that the SEC should make it harder to submit and resubmit previously denied proposals by increasing the ownership thresholds for making proposals to enable shareholders to submit a proxy proposal if they have owned $2,000 of the company’s securities for at least three years; $15,000 of the company’s securities for at least two years; or $25,000 of the securities for at least one year.

The SEC’s current proposal on climate disclosure should not be allowed to proceed, the group argued. It said that the proposal goes beyond the SEC’s authority to require climate-risk and greenhouse gas disclosure because these are not material concerns, and accuses the SEC of prioritizing “social justice” over investment returns.

The largest asset managers were also a target of the report. The “Big Three,” or The Vanguard Group, BlackRock and State Street Global Advisors, were identified by the group as posturing as passive investors that are actually quite active in voting to approve ESG and diversity, equity and inclusion initiatives. The report criticizes the firms for having signed an international net zero commitment, which Vanguard left at the end of 2022. The report says, “Congress should consider policies that better align the voting behavior of passively managed index funds with retail investors’ best interests.”

Lastly, the report argues that the U.S. government should be more active in advocating for U.S. securities issuers in the context of foreign regulations. The report specifically identifies the EU’s Corporate Sustainability Due Diligence Directive, which requires issuers with more than $150 million in market capitalization to disclose scope 3 emissions, referring to the carbon emissions of firms within a company’s supply chain, but not the company itself. The regulation applies to many U.S.-based issuers operating in the EU, and the group argued that the U.S. government should negotiate with foreign jurisdictions to remove or mitigate the applicability of foreign regulations to U.S. businesses.