House Democrats Defend ESG by Invoking Free Markets, Friedman

Ever since July was dubbed “ESG Month,” House Democrats have been orchestrating a counter-intuitive message: Defend capitalism and free markets.

House Republicans on the Financial Services Committee held at least one hearing every week this month to attack the use of environmental, social and governance principles in corporate investing. But the sessions—meant to lay the grounds for committee passage of a package of bills in a Thursday markup—have been disrupted by a wave of counter-messages by Democrats and shareholder activists.

Republican proponents say they are calling for legislation to restrict ESG investing to give shareholders more control, but Demoracts don’t see it that way.

“These are bills that were not created because some great national political leader thought this would be a good thing,” said Rep. Sean Casten (D-Ill.) in an interview. “I’m nervous because we have to defend markets; I’m not nervous that anti-wokeism is a theme outside of the very far right part of the Republican Party.”

Freedom Campaign

Democrats’ defense of ESG parallels a similar effort by shareholder advocacy organization Ceres, which launched a pro-ESG campaign in March called “Freedom to Invest.”

The campaign brought together 350 companies, investors and organizations to promote ESG factors in financial decision making. Ceres conducted “extensive” polling in Republican-led states to develop its message that ESG isn’t a ploy to drag companies and businesses leftward.

“Freedom is a term that hopefully all Americans use is patriotic, it is not owned by any one side,” said Steven Rothstein, a managing director at Ceres.

Throughout the hearings, Democrats invoked conservative economist icon Milton Friedman and said attacks on ESG are attacks on capitalism itself. The “freedom” to invest how one wants, or how companies determine risks, are component of the free market, Democrats said.

“Investors want this information because it’s good for the performance of their investments, which is also good for society,” said Rep. Maxine Waters (D-Calif.), the top Democrat on the committee, in prepared remarks during the first hearing. “That’s as capitalist and as American as it gets.”

More than just a message, allowing asset managers to continue to determine risks to achieve the best returns for their customers is capitalism and worth defending, said Rep. Juan Vargas (D-Calif.), and co-chair of the Sustainable Investing Caucus. And the strategy is working, he said.

“I think the public’s on our side—investors are on our side, they want this information, they’re already doing it,” he said.

‘Bizarre’

Republicans said their package of bills don’t prohibit ESG investment products. Rep. Bill Huizenga (R-Mich.). Huizenga, chair of the House GOP’s ESG Working Group, said the bills are designed to prevent the Securities and Exchange Commission from issuing regulations outside their scope, provide better oversight of proxy advisory firms and more.

“We’re in bizarro-upside-down world,” Huizenga told reporters. “No one is saying ‘You can’t do this’ if you are with a church group of investors or you are social-feel-good investors—whatever. What we’re saying is: You as an investor need to know that and have a say—not have it foisted upon you.”

The bills would limit the SEC’s ability to require companies to disclose certain information, reform the proxy voting-process, and prevent the SEC from regulating shareholder proposals.

But the bills are unlikely to get any support from Democrats during Thursday’s markup or later on the House floor. And they’re certainly dead-on-arrival in the Democratic-controlled Senate.

The plan is to establish a marker now, and if Republicans retake control of Senate and the White House, these measures could be passed, Rep. Andy Barr (R-Ky.) said.

“The legislative process sometimes requires patience and persistence: That means that even though maybe in this Congress, the hurdles are high, the barriers are in front of us,” he said in an interview. “Let’s start persuading members and ultimately, the goal is that we will vindicate the rights of retail investors.”

Democrats are convinced the term ESG will remain a wonky, financial term. Casten said he and fellow Democrats believe the measures won’t have the same staying power other financial-reform measures have had in the past that were introduced in one congressional session and later passed like the 2017 tax law and 2019 banking law.

Yet as long as Republicans attack ESG, Democrats plan to defend—oddly, Casten said—capitalism.

“It is bizarre to be the person quoting Milton Friedman to Republicans in the interest of shareholder primacy—but welcome to 2023,” he said.