The House Financial Services Committee announced on July 27 that, after investigating and considering ESG policy for most of the month, the committee advanced seven pieces of legislation opposing ESG.
Today, the House Financial Services Committee passed seven pieces of legislation out of Committee that establish a regulatory framework for payment stablecoins, protect self-custody for digital assets, overturn the CFPB’s disastrous small business lending data collection rule, and combat the influence of ESG initiatives in our financial markets.
Legislation passed out of the committee included the following:
H.R. 4767, the “Protecting Americans’ Retirement Savings from Politics Act,” offered by Rep. Bryan Steil (WI-01), improves the shareholder proposal and proxy voting process to prioritize corporate growth over partisan political issues. It raises resubmission thresholds for shareholder proposals, invalidates certain SEC regulations and guidance, limits the SEC’s ability to define a “major policy issue,” and allows companies to exclude environmental, social, and political proposals. Additionally, the bill provides transparency and accountability to the proxy advisory industry, prohibits robovoting, and requires proxy advisory firm clients to issue annual public reports on their proxy voting. Finally, the bill requires large asset managers to conduct economic analysis when voting against board recommendations and requires investors to consent to the use of non-pecuniary factors in decision-making.
H.R. 4655, the “Businesses Over Activists Act,” offered by Rep. Ralph Norman (SC-05), clarifies that the SEC does not have the power to regulate shareholder proposals through Rule 14a-8 and prevents the SEC from forcing companies to include or discuss shareholder proposals. Its goal is to limit the SEC’s control in this area and emphasize the role of state regulations in governing shareholder proposals.
Politico published its own assessment of the committee’s ESG activity in July, saying that the focus on opposing ESG is expected to continue in the coming months:
Over the course of six hearings this month, lawmakers on the Financial Services Committee mostly stayed away from bashing big business, as presidential candidates Vivek Ramaswamy and Florida Gov. Ron DeSantis have made hay doing.
Rather, they targeted federal agencies, as in a bill by Rep. Bill Huizenga (R-Mich.) that would limit the type of disclosures the Securities and Exchange Commission can compel and one by Rep. Ralph Norman (R-S.C.) to limit the SEC’s ability to regulate shareholder proposals. …
What was the point of the exercise? To whittle away at companies’ willingness to come out for progressive causes, says one ESG expert.
“Will any laws change? I think the answer to that is pretty clearly no,” said Josh Lichtenstein, a Ropes & Gray attorney who specializes in ESG issues. “But…together with what’s happening in the states, it starts to create a sense that should companies be considering whether to engage in these matters or not, there could be potential backlash or be hauled in front of committees like this.”
Sixteen states have passed anti-ESG bills this year alone, out of some 165 bills introduced. While GOP interest in the topic hasn’t waned, pushback from local business groups and state pension fund officials led some states to water down or kill some of their more heavy-handed efforts.
“I increasingly think about what’s going on in the House and the states as one movement,” Lichtenstein said. “When you look at it from that perspective, what’s happening in the House can help to set priorities for the states. I think there is a feedback loop even if the House doesn’t really have the ability to pass legislation.”
The beatings are likely to continue until morale improves. House Financial Services Chair Patrick McHenry (R-N.C.) told Jasper on Wednesday that this month’s hearings were “an opening act.”
Harvard reviews House ESG working group’s interim report
In its “ESG Midyear Review,” the Harvard Law School Forum on Corporate Governance addressed the Financial Services Committee’s ESG working group and, specifically, its efforts to improve the shareholder proposal process. Starting with the working group’s interim report, author Cyndy Posner gets into the details and says the following:
The report identifies a number of priorities, including reforming the proxy system, ensuring the accountability of the proxy advisory firms, enhancing the alignment of voting decisions with retail investors’ best interests (also involves proxy advisors), increasing transparency and oversight of large asset managers “to ensure their practices reflect the pecuniary interest of retail investors,” improving ESG rating agency accountability and transparency, and protecting U.S. companies from burdensome EU regulations. In addition, in light of the “politicization of the SEC”—as the Working Group sees it—another priority is to “strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy,” and to “demand transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies.” I counted at least 18 bills that the Committee is proposing to address these issues. …
the Working Group appears to view the shareholder proposal process as a critical mechanism used by activists to impose their agendas on companies, as evidenced by the volume of ESG-related shareholder proposals submitted this proxy season. The “recent surge in ESG-related proposals,” the Working Group contended, “adds unnecessary pressure on corporate boards, wastes corporate resources, and hinders informed decision-making by retail investors, who must spend valuable time reading and evaluating these proposals.” In the Working Group’s view, the “no-action letter process has become a mechanism for SEC staff to project its views about the ‘significance’ of non-securities issues, rather than a process for ensuring shareholder proponents’ interests are aligned with those of their fellow shareholders.”
According to the report, the increase in shareholder proposals resulted from changes in rule interpretations by the SEC “that made it easier for politically motivated proposals to be included in annual proxy statements. This resulted in a 51 percent rise in environmental proposals and a 20 percent increase in social proposals. Chair Gensler’s use of the SEC as a political tool is deeply concerning, as it puts the investments of hard-working Americans at risk and sets a dangerous precedent of weaponizing the agency for progressive purposes.” The report is referring to Corp Fin’s SLB 14L, the effect of which was to relax some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under three Clayton-era SLBs, which were rescinded, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. SLB 14L presented its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. …
The Working Group also took issue with the current ownership thresholds for submission of shareholder proposals, under which relatively small shareholders can submit proposals. In the Working Group’s view, these thresholds allow the process to be “overwhelmingly exploited by activists driven by social or political agendas, leading to an increasing number of ESG-related shareholder proposals. Moreover, given the significant influence of proxy advisors, companies are unable to exclude repeat ESG-related proposals, regardless of whether shareholders have previously rejected them. As a favorable recommendation from a proxy advisor firm can easily garner 25 investor percent support, shareholder proposals backed by proxy advisors can be resubmitted indefinitely, even if they don’t necessarily serve the long-term interests of companies and retail investors.” The report advocated that the SEC raise the thresholds for submission and and resubmission of shareholder proposals.
The SEC’s proposed amendments to Rule 14a-8 were another concern raised by the Working Group, particularly the proposed amendment to Rule 14a-8(i)(12), the resubmission exclusion, which would provide that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” The Working Group contends that these “proposed changes will result in significant abuse and circumvention of the rule, allowing activists to resubmit previously rejected proposals by making minor modifications to the text of the proposals,” and “will only serve to encourage more activism, placing additional strain on companies’ and investors’ time and resources.”
The report concluded by advocating “sensible reforms to the SEC’s no-action letter process” as well as greater autonomy for companies “in developing their own shareholder proposal procedures. By recognizing that corporate governance is primarily the responsibility of the company and its shareholders, decision-making should remain in the hands of those directly impacted.”
In the states
Arkansas laws opposing ESG take effect
Two new state laws in Arkansas creating an oversight committee to develop a list of companies using ESG in investment or boycott decisions go into effect today:
An Arkansas law creating an oversight committee that will consider banning companies that boycott energy and firearms companies goes into effect Tuesday.
The five-member committee has 90 days to submit its list, according to Act 411, signed by Gov. Sarah Huckabee Sanders in March. Appointees from the governor’s office, the House of Representatives, the Senate, the attorney general’s office and the treasurer or their representative will make up the committee.
A separate act establishes the criteria the committee can use to determine if companies are boycotting or using environmental, social and governance factors to assess financial decisions. Media reports, complaints from energy or firearms companies and public statements from the company are some measures the committee can consider.
The state and public entities could no longer conduct business with the companies. Both have a year to divest retirement accounts and 60 days to divest other holdings, according to the act.
The bills, both sponsored by Rep. Jeffrey Wardlaw, R-Hermitage, raised concerns about possible costs to the state. A clause was added to both bills that says the entities do not have to divest if they can prove it would cost them money.
The state treasurer will maintain the list. The governor can recall the committee if changes are needed, according to the act.
In the spotlight
Conservatives push back against CMT decision to pull Jason Aldean music video
Conservatives have pushed back against Country Music Television’s (CMT) decision to pull the music video for Jason Aldean’s song “Try That in a Small Town.” But, according to Forbes, the network may not have had a choice, given what the article calls the ESG goals of its parent company—Paramount Global:
When CMT pulled Jason Aldean’s music video for “Try That In A Small Town”, conservatives responded with outrage and threats of a boycott. However, the decision aligns with the stated environmental, social, and governance goals of Paramount Global, the parent company of CMT.
Aldean’s song was originally released on May 22 with little attention and quickly fell out of the top of the Billboard charts. The lyrics open “sucker punch somebody on a sidewalk, carjack an old lady at a red light, pull a gun on the owner of a liquor store. Ya think it’s cool, well, act a fool if ya like. Cuss out a cop, spit in his face, stomp on the flag and light it up. Yeah, ya think you’re tough. Well, try that in a small town.”
To conservatives, it echoed their frustrations with acts of violence they feel have become normalized in society. It wasn’t until the music video was released mid-July that the left took notice. The video featured news clips of violence at protests. Shannon Watts, founder of Moms Demand Action, called out Aldean for the video claiming it promoted gun violence. CMT pulled it from rotation. …
This decision by CMT, while controversial, aligns with the ESG goals of Paramount Global. Paramount Global is a publicly traded media conglomerate that owns multiple media organizations including Paramount Pictures, the CBS Media Group, and Paramount Media Networks, which controls CMT. The ESG report for Paramount Global governs all subsidiaries. …
The Paramount Global ESG Report 2021-2022 is divided into three categories: workforce & culture, sustainable production & operations, and on-screen content and social impact. It is the later which is the most relevant.
The question as to if ESG influences the content decisions of Paramount Global is clearly answered under the on-screen content section. “[T]he stories, characters, and messages of that content are a key component of our ESG strategy.” This is a diversion from some media companies who focus primarily on internal policies in their ESG report, separating programming decisions from ESG policy. However, Paramount Global does not shy away from the influence of ESG on their programming, stating:
“Our responsibility to our audiences and the world we all share informs our approach to creating the content we produce through our studios, networks, and streaming services. Through conscious policies, deep research, and a creative community that is willing to learn and grow together, we strive to create content that reflects and shapes culture. We work to drive awareness of important issues and to offer stories and insights that encourage new perspectives and engagement on issues shaping our society.”
“We recognize that our work – including news and public affairs programming, sports, movies, scripted and unscripted television series, live events, and more – has the power to address important social issues as well as deeply personal ones for our viewers, with possibly profound influence on the ways those issues are understood.”
Produced in association with Ballotpedia