02 Aug The GOP’s ESG Strategy
Again, the following commentary/forecast is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you in thinking about the federal government’s role in addressing ESG and how that might be changing.
ESG-JULY AND WHAT IT PORTENDS
As House Republicans wrap up their month-long focus on ESG and its various policy components, it is worth taking a brief look at what they did over the last 31 days and why they did it. Contrary to some expectations and especially to mainstream media spin, the House Financial Services Committee took “ESG-July” quite seriously, and not in a mere grandstanding or “raising awareness” way.
Late last week, the Committee passed and sent to the full House several bills dealing with serious financial questions, including ESG. Much of that legislation – both on ESG and on other matters – dealt specifically with concerns derived from the Securities and Exchange Commission’s behavior or proposed behavior. The relevant ESG bills – as described by the Committee itself – are as follows:
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.
And:
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.
It is worth remembering here that both of these bills (and any other ESG legislation the Financial Service Committee might forward to the full chamber) are likely to pass the full House and then die. Theoretically, they could pass the almost evenly divided Senate, but even if they do, they will be summarily vetoed by President Biden. In short, then, neither of these bills has any chance to be enacted into law.
Given this, one might suspect that the House was just wasting its time (and ours) last month, showboating for constituents back home or, at best, raising awareness of various ESG issues. But that’s probably not the case. Indeed, it is far more likely that the members of the Financial Services Committee were setting the stage for future action. Because of their focus on the issue and especially their message discipline – concentrating on regulatory reform rather than headline-grabbing “woke” corporations –House Republicans appear to be signaling that they believe two developments are imminent.
The most obvious of these two is a change in power, both on the other side of the Capitol and on the other end of Pennsylvania Avenue. Obviously, with more than fifteen months before the election, all forecasting is speculative. Nevertheless, the House Republicans’ focus suggests that they expect their fellow partisans to take control of both the Senate and the White House next year. And current polling confirms that they have just cause to be hopeful:
More Americans are Republicans than Democrats, according to multiple Gallup polls this year, upending a trend that has been going on since 1988.
Gallup’s most recent monthly poll, conducted throughout July, found that 27 percent of the country are Republicans, compared with 25 percent who are Democrats. Independents, at 45 percent, outnumber members of either party.
Many of those independents lean Republican, however. When the poll factors in the number of independents who lean Republican, 45 percent of respondents support the GOP, compared with 42 percent of respondents who either are Democrats or independents who lean Democratic.
Republicans have repeatedly outnumbered Democrats this year, the Gallup monthly polls show, reversing Democrats’ longtime dominance in party identification. Since 1988, the poll has shown a trend of more Americans identifying as Democrats than Republicans. Recently, the pollster found that, from 2016 to 2020, more people either identified as or leaned Democratic, according to yearly averages.
In 2022, though, Gallup found party membership tied, just as the media started reporting on what the Associated Press called “a political shift” toward the GOP.
“Across 31 states, about two-thirds of voters who have switched their official party registrations in the past year have switched to the Republican Party,” the AP reported. That shift was “pronounced”—and “dangerous for Democrats”—in the suburbs of cities such as Denver and Pittsburgh. While an expected Republican wave did not materialize in the 2022 midterms, Republicans took control of the House and won the popular vote.
The second development House Republicans appear to be anticipating – and, by far, the more important of the two – is the end of what is known as Chevron deference, “a doctrine of judicial deference that compels federal courts, in reviewing a federal government agency’s action, to defer to the agency’s construction of a statute that Congress directed the agency to administer.”
In May, the Supreme Court announced that it would hear the case of Loper Bright Enterprises v. Raimondo in its next session (starting in October). The case offers an opportunity for the Court to reverse its 1984 decision in Chevron U.S.A. v. Natural Resources Defense Council and, thereby, to retire the doctrine that has empowered the administrative state – particularly on environmental matters – and has frustrated conservatives to no end. Such a reversal would be monumental, to say the least:
Overturning the doctrine would have major implications for the Biden administration’s climate agenda. It would complicate the administration’s efforts to tackle major issues such as climate change via regulation, including possibly derailing the Environmental Protection Agency’s push to mitigate carbon emissions from the electricity and transportation sectors — the two highest polluting industries in the United States….
[T]he Chevron doctrine became a central pillar of administrative law and a key part of the legal defense for any number of environmental and other rules by both Democratic and Republican administrations. Although agencies did not win all the time, studies have shown more often than not the courts used it to uphold regulations.
Among other things, Chevron deference has enabled Congressional apathy and passivity, encouraging legislators to write laws broadly and vaguely, so as to force administrators to set specific regulatory parameters. In so doing, Congress has delegated its constitutional authority to unelected bureaucrats, sanctioning the vast expansion of the federal government’s purview while also allowing Members to evade responsibility for policies that are deemed ineffective, counterproductive, or burdensome.
The specificity with which the House Financial Services Committee approached the use of regulatory authority in its ESG (and other) legislation this past month suggests that these Members at least are anticipating a world in which all of this will be reversed, in which the administrative state will lose some of its bite, while Congress will be empowered (and required) to reassert a greater role in the management of the regulatory apparatus.
Particularly with the SEC still contemplating a new rule requiring publicly traded corporations to disclose and report environmental data, it is nearly impossible to overstate how significant such developments would be.
In other words, don’t let appearances or media bias fool you. ESG-July may not have accomplished much tangible, but it may well have been both a big deal and a huge sign of what’s to come.
