Americans for Tax Reform is proud to support Chairman Patrick McHenry (R-N.C.) and the members of the U.S. House Committee on Financial Services for their leadership in drafting legislation and setting a date to consider and vote on various bills that move the ball forward in combatting environmental, social, and governance (ESG) standards. Whether it is through investment products or proxy voting and corporate governance, ESG is preventing investment advisers from maintaining their fiduciary duty and forcing corporate America to focus on initiatives that deviate from the financial best interests of shareholders. In most cases, the true shareholders of corporate America are workers with a retirement plan. Private sector workers may have a 401(k) plan or employee stock ownership plans (ESOPs). State government employees likely have a defined benefit plan, or pension plan. Federal government employees likely elect to have portions of their paychecks deposited into their Thrift Savings Plan. All the assets accumulated through the years of hard work by America’s private and public sector workers are likely being invested by a third-party investment adviser (e.g., BlackRock and Vanguard).
In many cases, shareholders of corporate America are America’s workers because they own the economic, or “beneficial” interest in many of America’s public companies. The U.S. retirement market amounts to $33.6 trillion. By comparison, about $15.6 trillion is indexed to the S&P 500. However, when it comes time to participate in a company’s annual shareholder meeting, investment advisers or institutional investors vote proxies or submit shareholder proposals, not individual investors. There is nothing currently in law that requires investment advisers to vote proxies in accordance with the request of fund investors. H.R. 4767, which is up for consideration in committee, rectifies this concern. However, proxy advisers, such as Institutional Shareholder Services and Glass Lewis, will maintain influence over proxy votes even after investors possess more authority to vote their own proxies. If an investor is a pension fund, their board may follow the vote recommendations of ISS and Glass Lewis to a T. To assuage these concerns, the bills up for consideration also require more transparency from the proxy advisers, prohibit robovoting, and codify the meaning of “materiality,” so the SEC cannot require companies to adopt shareholder proposals that fail to pass the litmus test for directly affecting financial performance and returns. Moreover, the proposals being considered this week will require investment managers to stick to their fiduciary duty and make investment decisions and vote proxies solely in the best interest of American workers. After all, the U.S. Supreme Court already found that certain retirement funds must offer returns that are explicitly financial in nature.
All the anti-ESG bills proposed by the committee should be lauded. The bills will be up for a vote in committee starting at 9am EST on Thursday, July 27, 2023.
The bills being considered tackle ESG from a multiplicity of angles. This is by no means an exhaustive list of all the bills, but here are some of the notable provisions:
- Forces the Securities and Exchange Commission (SEC) to only require disclosures that are “material.” This is to ensure that public companies only have to focus on the financial performance of the company and not on ancillary priorities that offer little to no shareholder value.
- Mandates that investment advisers focus solely on pecuniary factors when investing on behalf of another person.
- Holds proxy advisers accountable for any potential conflicts of interest.
- Requires federal regulators to report to Congress on any actions they take within a nongovernmental organization, such as the Financial Stability Board (FSB) or the Basel Committee on Banking Supervision. America’s federal regulators should not be influenced by international organizations that have no supranational authority to apply rules to American citizens.
- Mandates passively managed index funds to vote proxies in accordance with the owners of the fund’s shares.
- Authorizes the exclusion of superfluous shareholder proposals that are duplicative or fail to pertain to the financial performance of a company.
ATR urges the swift passage of the committee’s legislation pertaining to ESG. It is desperately needed to ensure that the U.S. capital markets, and corporate America continue to focus on financial returns and shareholder value. Financial returns for shareholders, which in many cases are individual American workers, should be preserved ad infinitum. The committee has set the course to do just that.
The committee’s memorandum summarizing the bills may be found here.
To view legislative text and watch the markup click here.