Last week, the House Financial Services Committee held a hearing entitled "Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation."  As indicated by the title of the hearing, the focus was on critiquing ESG regulations proposed or adopted by federal administrative agencies and criticizing the recent activities by shareholder activists and others to compel corporations to incorporate ESG principles into their practices.

Specifically, the hearing focused in particular on "the proxy process" and "untethered shareholder activism," and the role of "[t]he Securities and Exchange Commission (SEC) [in] exacerbat[ing] this problem by promulgating changes that facilitate the inclusion of politically motivated shareholder proposals."  According to the Committee, this "shift in focus towards advancing environmental, social, and political policies detracts from the primary purpose of public markets--to enable companies to raise capital and foster economic growth."  Additionally, the hearing also criticized "the federal government's imposition of climate reporting and other requirements," including "the SEC['s] [] proposed [] 500-page climate disclosure."   

This hearing is merely one of a multi-pronged assault on ESG principles embarked upon by the House Republican majority this month.  (For example, the House Judiciary Committee is undertaking an inquiry into whether certain asset managers may have committed antitrust violations by agreeing to reduce emissions. (https://www.natlawreview.com/article/house-republicans-issue-letters-to-major-asset-managers-concerning-potential).)  While it is unclear the extent to which these initiatives will extend beyond political theater into enactments of policy (unlikely given the Biden Administration and the Democratic Senate), these activities are nonetheless revealing in indicating likely policy initiatives under a Republican administration and identifying legal strategies that may be employed by Republican state attorneys-general and private parties (among others) in using the courts to attack ESG policies and regulations.  (Bearing that in mind, the focus on the corporate proxy process at the hearing is particularly significant.)  For that reason alone, it is useful to monitor these developments on Capitol Hill. 

One area that requires greater transparency and accountability is the proxy process, which no longer promotes long-term shareholder value efficiently and effectively. Currently, untethered shareholder activism diverts attention and resources from core issues, thereby undermining the attractiveness of U.S. markets and deterring companies from going public. The Securities and Exchange Commission (SEC) has exacerbated this problem by promulgating changes that facilitate the inclusion of politically motivated shareholder proposals in annual proxy statements and reversing important reforms to proxy solicitation rules. This shift in focus towards advancing environmental, social, and political policies detracts from the primary purpose of public markets—to enable companies to raise capital and foster economic growth.

Furthermore, the federal government’s imposition of climate reporting and other requirements diverts corporate resources away from growth and competitiveness. For instance, the SEC has proposed a 500-page climate disclosure rule https://docs.house.gov/meetings/BA/BA00/20230712/116194/HHRG-118-BA00-20230712-SD002.pdf