Conservatives are attacking the entire premise of socially responsible investing (SRI) nationwide. While our last newsletter focused on state legislative laws that curb the integration of social and environmental risks into investment decision-making, the larger threat is the House Financial Services Committee (the Committee).
In July, the Committee held “anti-ESG” hearings in the Capitol, and it was quite a spectacle. More political theater than substance, some of the talking points nevertheless may have influenced some large institutions to reduce use of the terms sustainable, impact, responsible—as well as environmental, social, and governance (ESG)—to avoid political scrutiny.
This outcome will push the pretenders in the industry back to their conventional caves and hopefully yield greater clarity for investors and advisors regarding the firms that are truly embracing the tenets of SRI.
Regardless, the Committee pushed forward four bills that would significantly reduce the power of the Securities and Exchange Commission (SEC), change the shareholder proposal process to bar the presentation of ESG proposals, and alter proxy voting on shareholder proposals to be more costly and cumbersome for many socially responsible investors:
- The Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act
- The Protecting Americans’ Retirement Savings from Politics Act (H.R. 4767)
- The Businesses Over Activists Act (H.R. 4655)
- The American Financial Institution
Regulator Sovereignty and Transparency (American FIRST) Act (H.R. 4823).
The bills show that these politicians don’t seem to recognize that companies operate in a social and environmental context in which risks to financial performance are pervasive and constant.
What’s more disturbing is their efforts to limit freedom of choice among socially responsible investors and investment professionals to make decisions using what investors consider to be material issues affecting companies.
Their more insidious threat is to undermine shareholders’ ability to file proposals to vote on various issues that affect company finances. For example, the Businesses Over Activists Act proposes the elimination of the SEC’s authority to regulate all shareholder proposals, suggesting the agency lacks the authorization to require companies to publish shareholder proposals.
The supposedly tamer ”Protecting Americans’ Retirement Savings from Politics Act“ would allow companies to exclude ESG proposals from proxy ballots, drastically increase the “yes” vote threshold required for proponents to resubmit proposals the following year, and require large asset managers to provide economic analyses for proxy voting decisions. The legislation would also require index mutual funds to either vote according to the instructions of beneficiaries, vote with management, or abstain from voting.
Of particular interest to us at Natural Investments is that the law would require registered investment advisers to obtain clients’ written consent to include ESG issues in the investment strategy.
Of course, we already do that, but many advisors may not, and clearly the legislation is attempting to limit advisors’ ability to select ESG-related investments without client consent.
The overall conservative theory is that a small handful of radicals are colluding to practice “woke” capitalism, ignore the will of investors, and violate our fiduciary responsibility for considering ESG risks.
The hearings in July also focused on limiting the autonomy of proxy advisors that provide recommendations to subscribing companies and organizations on many ballot proposals. Given that there are thousands of shareholder meetings each year, these services, including the one Natural Investments uses, As You Vote, provide insight on the ballot proposals. This helps us meet our fiduciary responsibilities by providing efficient and cost-effective fee-for-service research that informs our voting decisions; no one makes voting decisions on our behalf.
The autonomy of proxy advisors is critical to investors, as it prevents us from having to rely solely on recommendations from company management, which is often opposed to ESG shareholder proposals and often ignores, conceals, or spins such issues to the detriment of the company.
Republicans mistakenly purport that “activists” are duping investors and forcing them to adopt an anti-capitalist agenda. Nothing could be further from the truth. Everything in our industry is designed to help, not hurt, companies. We hope that Republicans will read the studies showing returns on SRI were comparable to the overall market in 2022. Moreover, a recent Morgan Stanley study showed that 80% of all investors and 95% of millennials are very interested in sustainable investing.
Conservatives are politicizing investing with their proposed legislation to directly counter the clear interests of most investors.
Their efforts to sharply reduce investors’ ability to vote on or file shareholder proposals, or use research firms to help inform them, are incredibly anti-democratic. They are essentially suggesting that investors should give their savings to companies and investment firms but not have any voice in how it is invested. Micromanaging the professionals in the industry, who live and breathe risk analysis every day, poses a serious threat to the integrity of the field. It interferes with our ability to act as fiduciaries on behalf of investors and may expose investors to entirely avoidable financial risks and consequences.
Fortunately, our industry has allies on the Hill. Since January, the members of the new Congressional Sustainable Investment Caucus have been holding educational meetings for Congressional aides to learn how to counter Republicans’ false narratives with data and facts about how sustainable investing functions in the marketplace. Many of these members provided solid counterarguments during the Committee hearings in July, rightfully couching conservative efforts as curtailing investor freedom of choice.
As socially responsible investors are not forced to invest in ESG-related funds, the market reflects the reality that accounting for long-term risks and opportunities is just good business and good investing.