Throughout July, the House Financial Services Committee will conduct a series of hearings aimed at limiting the use of environmental, social and governance (ESG) information in investing and corporate decisions. Americans should find this overstep by the committee concerning and, frankly, misguided.
(Editor’s note: The panel’s hearing on Friday, July 14, included participants suggesting that ESG considerations drive up housing and insurance costs.)
Investors should be free to consider all types of data when making investment
decisions. The health and safety of a corporations’ workforce, or the way corporate leadership is preparing for a continually warming climate can have an impact on a company’s bottom line. ESG investing is a meticulous financial discipline that blends sustainability-related criteria with all other financial factors to generate competitive, long-term returns.
Critics have framed ESG-conscious investors as “activists” and painted the tools that investors use – financially-material data and information, shareholder dialogues and proxy voting tools – as overreach. Nothing could be further from the truth.
Owning shares in a company gives investors a voice and an opportunity to raise
important issues and bring them to the attention of company management, other shareholders and the public. Shareholder dialogues and engagements do not automatically result in filing shareholder resolutions. In fact, productive discussions occur most often in the absence of formal resolutions. But equally, when resolutions are filed, they are often the catalyst for a productive discussion between management and shareholders.
Related: Retirement stock plans — and increasingly, 401(k)s — can use ESG scrutiny: Labor Department
“Anti-ESG” proponents suggest large asset managers and proxy advisory firms are pushing a “left-leaning agenda,” yet the data does not support this. The truth is proxy advisory firms provide independent analysis to assist institutional investors in making better-informed decisions.
Read:‘Woke’ is being used to describe everything and nothing. What does it actually mean?
Sustainable investing is no longer niche. As of year-end 2021, US SIF Foundation identified that it represents 13% of total professionally managed U.S. assets under management. Over the past five years, mutual funds and ETFs that emphasize ESG and invest in stocks and bonds have outperformed conventional funds.
Corporations believe ESG policies are integral to their management practices as well. Executive teams are increasingly tying their compensation to sustainability targets, further emphasizing the significance of ESG principles in modern corporate strategy.
According to Governance and Accounting Institute, 96% of S&P 500
SPX,
+0.36%
and 81% of Russell 1000
RUI,
+0.38%
companies published sustainability reports in 2021.
Even as mostly Republican lawmakers are attacking proxy voting and shareholder engagement, they continue to stress the importance of corporations acting as responsible citizens and disclosing environmental impacts. Sen. Marco Rubio, the Republican of Florida, said in an op-ed critical of the government response to the devastating chemical train derailment in East Palestine, Ohio, “We cannot allow ourselves to become a country that values sales and deliveries more than the lives of our citizens and the health of our communities.”
This suggests a shared interest with investors in accessing clear information about a company’s operations, values and practices.
Strong disclosures improve transparency, guide informed investment decisions, and often encourage productive discussion between shareholders and management about issues like those raised by the incident in East Palestine.
Overseas, new European regulations are emphasizing the importance of climate change-related disclosures, thus adding to the global relevance of ESG. Because of these regulations, U.S. investors with European interests are already adjusting to these regulatory changes, and U.S.-based companies with European operations are also preparing to meet these new reporting requirements.
Moreover, proposed limits on ESG investing come with a hefty price tag. A study earlier this year from The Sunrise Project estimated that Oklahoma, for example, would have to pay almost $50 million in bond interest every year because of the bill passed that banned the state from doing business with companies perceived to be “boycotting” oil
CL00,
-1.55%
and gas companies.
Similar state-level actions limiting ESG in Texas, Indiana, Kansas and beyond have increased interest and investment costs and promise to limit investment outcomes.
Efforts in the Trump administration to limit ESG faced significant opposition with a staggering 95% of investors pushing back against the Trump administration’s attempt to restrict the use of ESG data in retirement plans, according to US SIF data. In addition, 100% of institutional investors who submitted comments to the SEC’s proposed climate risk disclosure rule were generally supportive of mandatory climate disclosures.
Curbing the disclosure and assessment of financially material ESG data and information is shortsighted. More transparency and discourse around sustainability risks and opportunities are not only good for business and consumers but are essential to ensuring long-term value of the investment portfolios that underpin the health and resilience of our capital markets.
Maria Lettini is CEO of US SIF: The Sustainable Investment Forum, a leading
voice advancing sustainable investing across all asset classes.