What mid-term results mean for ESG investing

Republican victories in federal and local races this week are expected to ignite partisan clashes over the financial world’s growing attention to climate change.

It’s just not enough to significantly dampen the momentum on the issue.

That’s the case, experts say, because Republicans have relatively few tools at their disposal to force the financial industry to ignore an issue that poses major economic threats — a reality that financiers and their regulators are compelled to address. take into account.

“The only reason companies would want to play with this stuff is because they see it can add value to the company in the long run,” said Jon Hale, who leads the research at sustainability at Sustainalytics, sustainable finance and corporate governance. research and rating firm.

“Politicians who aren’t investment experts won’t be able to legislate this,” Hale added.

The results of this year’s midterm elections are not yet final. But forecasters continue to predict that congressional Republicans will win a majority in the House, with control of the Senate resting on a Georgia runoff election. In the United States, meanwhile, there won’t be much turnover among public officials most hostile to environmental, social and governance investments.

If Republicans take control of the House, Rep. Patrick McHenry (RN.C.) — who easily won re-election this week — is expected to chair the House Financial Services Committee.

He repeatedly raised concerns about the Securities and Exchange Commission’s proposed rule to compel companies to disclose more climate-related information and accused the Biden administration of “pushing its climate agenda through financial regulators because that they don’t have the votes to pass it in Congress. .” He also recently signaled that the issue would be a priority if he led the committee.

If the Senate flips, Sen. Tim Scott (RS.C.) — also newly reelected — would likely become the top lawmaker on the Senate Banking, Housing and Urban Affairs Committee. Republican oversight of either or both committees would likely lead to greater scrutiny of climate-focused financial firms and regulators, including the SEC.

“If either house changes hands, I think you’ll see an increase in noise around ESG attacks,” said Bryan McGannon, who leads the Forum’s policy and programs for the sustainable and responsible investment. “But I don’t think you’ll see actual legislation going anywhere.”

That would be the case even if Republicans win control of both chambers, as any legislation would need a green light from President Joe Biden – who has made climate-related financial risk a top priority.

A more likely avenue to thwart the SEC in particular, experts say, could be to attach an endorsement to the drafting of appropriations bills that would prohibit the agency from using funds to work on climate-related issues.

Proponents of sustainable finance will follow this possibility. But Hale, McGannon and Cynthia Hanawalt, a securities litigator and senior fellow at Columbia University’s Sabin Center for Climate Change Law, said the approach was unlikely to succeed.

“What’s interesting about the exit polls, from my perspective, is that voters said they trusted the Democrats on three key issues: one of them is the climate,” Hanawalt said in an email. “If Republicans win the House, it will be with a narrow majority, so they would be taking a political risk of delaying the budget on an issue where their standing with the electorate is already weak.”

That leaves the courts.

“Now where they have an opportunity — but that doesn’t involve congressional scrutiny — is through the courts,” Hale said. “Republicans are expected to challenge the climate risk disclosure rule in court.”

“Absolutely bifurcated”

The midterms have drawn the attention of the most high-profile state officials against ESG — particularly attorneys general, who have threatened legal action against financial firms such as BlackRock Inc. who adopted sustainability goals for the public.

Six of the 19 attorneys general who sent a threatening letter this summer to BlackRock are leaving office. But don’t expect much change from these states.

Some Republicans had term limits, such as Arkansas Attorney General Leslie Rutledge, and will be replaced by other Republicans. Two of them – John O’Connor of Oklahoma and Lawrence Wasden of Idaho – lost the primaries to conservative challengers. Eric Schmitt of Missouri was elected to the Senate and his replacement will be chosen by a Republican governor.

Only one of them, Arizona Attorney General Mark Brnovich, could be replaced by a Democrat. This race was too close to be announced on Thursday.

Other state officials campaigning against ESG — like Texas Comptroller Glenn Hegar — have also won re-election.

“Among the GOP candidates for re-election, most Republican AGs involved in anti-ESG efforts won re-election, as did the senators who wrote the threatening letters to the law firms. We’re watching Arizona: The gubernatorial race and the AG race will have implications for sustainable finance efforts, as Arizona has had mixed results attempting anti-ESG legislation last year.” Hanawalt, of the Sabin Center, said in an email.

Perhaps equally important, Republicans have retained control of most of their ruling trifectas — the states where they control the governor’s mansion as well as both legislative houses.

So far, four states have passed “anti-boycott” laws — restricting state activities with companies that use ESG — and two others have passed laws against investing state money. in ESG Funds, According to Morgan, Lewis & Bockius LLP.

More than a dozen other states have introduced their own bills, and now they will have another chance to pass them.

One of the first states to go through this process was Texas, which passed its “anti-boycott” legislation in 2021 and released its corporate blacklist in August. The legislation has barred local authorities from doing business with lenders that have implemented ESG policies or divested from fossil fuel-based Texas companies. But pundits criticized it as a political stunt (climate wire, September 6).

After the Texas law was passed, JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Fidelity Investments – five of the state’s largest underwriters – exited the market, according to researchers at the University of Pennsylvania. and the Federal Reserve Bank of Chicago. That reduced competition for borrowing and raised interest rates, according to research published in July, costing taxpayers an additional $303 million to $532 million in interest over eight months.

Democratic-led states, meanwhile, have stepped up pressure in the opposite direction.

Officials in 13 states, including California and Illinois, as well as New York City, told financial firms earlier this year that they expected them to strengthen ESG screening, not just they reduce it.

“It’s highly likely that many states will continue to have their own ESG initiatives and they’re absolutely bifurcated,” said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management LLC, during the talk. a webinar on Thursday.

“Ultimately it will come down to whether we really believe the fiduciary duty includes all material information or not,” she said. “And if you decide, based on the policy, that certain things are not fiduciary even though they are financially material, then we have a major financial problem that is going to cost all pensioners.

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