Republican Group Says ESG Rules Circumvent the Legislative Majority

In a report titled: "The Failure of ESG: An Examination of Environmental, Social, and Governance Factors in the American Boardroom and Needed Reforms," a Republican working group ("ESG Working Group") responded to "the troubling increase in efforts to force progressive policies on the private sector."

The Working Group criticized the impact of ESG initiatives on the economy, focusing on initiatives that "promote unpopular, progressive policy objectives that cannot pass through the appropriate legislative channels." In the report, the Working Group (i) "examine[d] the implementation of a far-left ideological agenda on businesses and investors;" and (ii) "identif[ied] solutions to protect investors and our capital markets from this misaligned and divisive agenda."

In the report, the Working Group detailed an "elaborate but interconnected ESG ecosystem." The Group summarized "why ESG investing has been hard to define but has resulted in lower returns for investors without accomplishing the liberal policy goals that activists often promote" and described "problems with the proxy voting process and the role of proxy advisory firms, institutional investors, and ESG rating agencies."

The Working Group argued that the climate disclosure rule was beyond the statutory authority of the SEC to issue, and raised the cost of an issuer becoming subject to SEC registration requirements. The Working Group said that the SEC failed to justify the economic materiality of the required disclosures and failed to "conduct adequate cost-benefit analysis."

The Working Group also focused on SEC proxy rules that allow shareholders with insignificant economic interests in an issuer to put forward proposals that have little to do with the business of the issuer, so long as the SEC judges the proxies to be socially significant. According to the Working Group, these proposals are in many cases adverse to the interests of the shareholders and are expensive to process.

Among its recommendations, the Working Group proposed: (i) "strengthen[ing] oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy;" (ii) "demand[ing] transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies;" and (iii) "protect[ing] U.S. companies from burdensome European Union (“EU”) regulations."