This week, the Senate Banking Committee held a hearing examining environmental, social, and governance (ESG) criteria and initiatives in investing by index funds as well as the role of proxy advisory firms in advancing ESG initiatives.  The hearing featured a contentious atmosphere amid diametrically opposing views from Democrats and Republicans. 

The Role of ESG in Investing.  Republicans warned of the use of ESG initiatives at the expense of shareholder growth.  They focused on whether retail investors are given adequate insight as to how ESG initiatives are being incorporated into investment decisions made by investment advisors and incorporated into the investments in their retirement accounts, as well as voting research by proxy advisors.  

Democrats on the other hand, lambasted effort to repress valuable ESG information, characterizing it as mainstream information needed by investors and other stakeholders in a standardized format in order to properly evaluate long-term company performance and sustainability.  Democrats and Republicans also sparred over the use of shareholder proposals and whether the ownership requirements should be increased in order for proponents to be eligible to submit a resolution.  

Proxy Advisory Firms and ESG.  Proxy advisory firms featured a central role in the hearing as Republicans queried whether proxy advisory firms were pushing ESG initiatives to increase their own profits at the expense of the fund and retail investor profitability. James Copeland, Senior Fellow and Director of Legal Affairs at the Manhattan Institute, noted that proxy advisory firms were much more likely to support ESG issues and shareholder proposals than the average shareholder.  Mr. Copeland cited Manhattan Institute research demonstrating that proxy advisory firm recommendations are associated with a 15% increase for a shareholder support.  Thus, the support of ESG proposals by proxy advisory firms has the impact of driving broader support for ESG proposals, which Republicans argued were not in line with maximizing shareholder values and retirement returns of the “Main Street” investor.  

John Streur, President And Chief Executive Officer, Calvert Research and Management, dismissed the political bend of proxy advisory firms stating that his and other funds are only interested in excelling in the ultra-competitive fund market.  Later, Sen. Brian Schatz (D-HI) argued that ESG issues are not political in nature – as Republicans characterized – but are mainstream issues and thus consistent with the fiduciary duties of major investors. Sen. Schatz cited pressure to act on climate change and disclose company efforts in response as specific evidence.