5 Takeaways From Anti-ESG Congressional Hearing

5 Takeaways From Anti-ESG Congressional HearingMay 17, 2023

Last week, the U.S. House Committee on Oversight and Accountability held a hearing to advance the anti-ESG push which is losing ground in state legislatures as the impact of shifting major costs to taxpayers and retirees comes to light. The hearing highlighted the absurd arguments behind the anti-ESG push, the harmful and anti-free market impact of anti-ESG legislation, and the real risks to businesses, investors, and communities that ESG information considerations provide.

5 Takeaways From Anti-ESG Congressional Hearing

In their opening remarks and throughout the hearing, both of the majority witnesses, Alabama Attorney General Steve Marshall and Utah Attorney General Sean Reyes revealed the basis of their anti-ESG arguments, espousing conspiracy theories about a “cabal of elites” and “unelected bureaucrats” trying to “hijack” capitalism, “capture corporations,” and impose social policy in undemocratic ways.

While the minority witness, Illinois State Treasurer Michael Frerichs discussed the need to use all information on potential risks to businesses’ bottom lines while investing and the importance to his duty as a state treasurer to think long-term about providing stable returns for pension beneficiaries, Attorneys General Marshall and Reyes continued to push conspiracy arguments about efforts of a “cabal of elites” to “restrain trade and commerce,” “reduce competition,” and threaten American democracy.

U.S. Representative Seth Magaziner, a former state treasurer, highlighted how both of the majority witnesses lack investing credentials, pointing out they “have experience trying to overturn elections that were fairly won, but not incorporating smart ESG factors into investment decisions.”

Much of the anti-ESG legislation across the country restricts fund managers' choices and access to information on risk when making investment decisions. Treasurer Frerichs plainly laid out why smart investors across America and the world consider ESG information when making investment decisions.

“ESG is data…additional information that investment professionals use to assess risk and return prospects. It is about value, not about values…The more data we as investors have, the better informed our decisions are when selecting investments over the long term,” shared Frerichs.

Frerichs went on to state that ESG information is used to integrate more data into investment decisions that can provide a better idea of risk and growth prospects — and no one is forced to consider this additional data.

Using an analogy to help explain ESG information to members of the Committee, Frerichs noted that it’s similar to a good pair of glasses that help investors see the long-term profitability of companies better. He also likened ignoring the additional information to picking a fantasy football team without knowing the players’ weights, injury status, or track records, stating that investors “can’t make good decisions without useful pertinent information — and that’s what ESG is.”

Frerichs also noted that ESG information is crucial because of the evolution of company values that we’ve witnessed over time. The main drivers of businesses’ financial value have evolved from tangible goods to brands and intellectual property, which makes businesses subject to different types of risks than they were fifty years ago.

Attorney General Reyes disagreed with the idea that more information is better, continuing to espouse conspiracy arguments about elites that manipulate data to drive a specific outcome. Later, when asked by U.S. Representative Eric Burlison if more information would be better in the case of understanding the factors investment managers use to make decisions, Attorneys General Marshall and Reyes both agreed.

But Attorney General Reyes made the case for considering more data when making financial decisions by citing an example of Standard & Poor’s looking solely at the factor of drought in Utah when considering a credit rating:

“Standard & Poor’s issued ESG indicators alongside the creditworthiness for states, and a state like Utah that has a AAA rating, Standard & Poor’s would point out in one instance, the issue of drought, without taking into consideration a whole other host of mitigating facts that Utah has — anti-drought measures — by itself and without the context, Standard & Poor’s all of a sudden makes it look like the most important factor isn’t Utah’s creditworthiness over a long history, a AAA credit rating, but one particular factor of drought, and in that instance it illustrates my point of distortion,” said Reyes.

Anti-ESG legislation proposed in Republican-controlled legislatures across the nation have been defeated or significantly weakened after alarms were raised over the bills’ impacts of shifting major costs to taxpayers and retirees. States like Indiana, Iowa, Kansas, Mississippi, North Dakota, and Wyoming have all seen anti-ESG bills defeated or severely watered down.

While questioning Treasurer Frerichs, U.S. Representative Maxwell Frost brought up how these laws passed in Florida will cost taxpayers more than $300 million. Frost also noted how similar legislation in Kansas and Indiana would have cost $3.6 billion and $6.7 billion over ten years respectively in lower pension returns had the legislation not been amended.

Frerichs stated that these bills are facing backlash “because they’re anti-free market,” they pose high costs to taxpayers, and they’re being pushed by special interests. Frerichs continued, stating that if Congress were to make similar decisions on legislation as these states, they’d end up costing our country “trillions of dollars.”

Throughout his testimony, Treasurer Frerichs explained how considering ESG risks is a way to examine serious and material financial risks to investors, companies, and the communities they operate in.

While being questioned by U.S. Representative Jamie Raskin, Frerichs discussed Purdue Pharma as an example, stating that if only their financial returns were considered, they’d appear to be a profitable company. But Frerichs’ decision to seek out more information about the risks of selling highly addictive opioids — “reputational risks, regulatory risks, and litigation risks” — helped Illinois avoid a large investment in the company, which ended up filing for bankruptcy.

While answering questions from U.S. Representative Alexandria Ocasio-Cortez, Frerichs brought up Norfolk Southern as an example of companies that engage in strategies to cut costs in order to increase profits, which can create material financial risks. Norfolk Southern reduced their workforce, including safety and maintenance positions, and increased the number of cars on their railroads to cut costs and raise profits — the resulting derailment cost investors, shareholders, and beneficiaries real dollars, and had a significant detrimental impact on the surrounding community.

Ocasio-Cortez discussed how the U.S. House Committee on Oversight and Accountability has been “charged with investigating companies that have abused the public by deliberately leaving critical information off of balance sheets.” Ocasio-Cortez continued to point out examples of companies not providing information to investors that could have indicated material financial risk, including:

U.S. Seth Representative Magaziner also pointed out that investors in companies that have failed to take ESG information on risk into account have “lost a lot of money” as a result, citing BP and Volkswagen as examples.

Across the country, and in Congress, elected officials are pushing hard to change laws to allow them to tell investors which businesses they can and cannot invest in, and the types of information they’re allowed to consider when making those investment decisions.

“[The anti-ESG push is a] disingenuous intrusion in our free market system. If unchecked, this war on investors will stifle economic growth, cost taxpayers and pensioners billions of dollars as many studies have already found, and it will obstruct investors’ ability to protect and grow people’s hard-earned savings,” stated Treasurer Frerichs.

Frerichs shared that he wants the right to consider all information on material financial risks to companies Illinois is considering for investment and if other states don’t want to consider the information, if they want lower pension fund returns, that’s their choice.

The majority witnesses, Attorneys General Marshall and Reyes used their conspiracy-driven arguments to contend that they are protecting freedom by outlawing the consideration of ESG information in investing because companies are being forced, unlawfully, to make certain decisions by a cabal of global elites looking to impose social policies on Americans.

But, Frerichs pointed out how their argument is based on false premises, stating that asset owners who voice their opinions on company priorities and decision making should be doing so because they are shareholders of those companies. Shareholders rightfully have a voice and a seat at the table to share their opinions on how to maximize profit and avoid financial risks to the company, their investment, and their beneficiaries.

When taking questions from U.S. Representative Cori Bush, Frerichs noted that Texas’ 2021 anti-ESG law that limited the number of financial firms the state could use for debt issuance reduced the level of competition between firms, resulting in higher costs shifted to taxpayers — which could end up costing up to $500 million per year. Frerichs continued to say that he finds it difficult that he’s the one defending the free market and the ability to have competition and access to data, and for shareholders to have rights. 

U.S. Seth Representative Magaziner also highlighted how “because we have a free market,” investors are “voting with their feet,” and choosing asset managers which take ESG information on material financial risk into account.