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GOP Geared Up for Anti-ESG Push After Midterm Elections, Should Proxy Advisors Be Nervous?

As Republicans prepare for what pollsters believe will be a major election victory in the 2022 Midterms, efforts are already underway in conservative circles to fight the growing ESG movement through congressional action and actions taken by corporate actors.

If Republicans win control of the U.S. House in the upcoming midterm elections, some significant changes could be in store for ESG funds and investors.

Utah Rep. John Curtis, a Republican, said in an interview, “Forever and ever, board members’ primary responsibility was fiduciary responsibility to shareholders. Somehow, without legislation, that has changed, and shareholders I think are being duped, not knowing that those who are representing them aren’t representing their financial interest.”

Former Vice President Mike Pence wrote in an op-ed for the Wall Street Journal, “The woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.”

Federal legislation has already been introduced that would require retirement plan sponsors and investment advisers to prioritize financial returns over ESG concerns. A co-sponsor of the bill, Rep. Andy Barr of Kentucky, is especially interested in protecting fossil fuels: “This is about maximizing investor returns. It’s also about making sure that the energy sector has the financing that they need to both innovate for climate and also provide affordable energy for the American people.” Curtis has said that activist investors want “to kill fossil fuels and not reduce emissions.”

Corporate actors are also urging more action. The Corporate Citizenship Project, a think-tank chaired by Terry Branstad, a former US Ambassador to China and Governor of Iowa, is working with publicly traded companies to “reign in the excesses” of the ESG sector.

“ESG activists from proxy advisors like ISS to rating firms like S&P seem to be using politics as a proxy for ESG ratings,” said Rashida Salahuddin, President of The Corporate Citizenship Project.

“The most glaring example was the de-indexing of Tesla from S&P’s ESG index within the same week that Elon Musk announced he was planning to vote Republican. The message from ESG activists to corporate CEOs could not be clearer.”

With many proxy advisors turning their attention towards gun manufacturers, some CEOs have begun speaking out more publicly. After calls for reform at Sturm Ruger, CEO Christopher Kilroy lamented that Institutional investors, who hold about 72% of Sturm Ruger’s outstanding shares, “blindly” follow guidance from ESG rating agencies like Institutional Shareholders Services and Glass Lewis when deciding how to vote.

In response, some states have enacted legislation that aims to prevent such imposition of  ESG issues on companies, shareholders, or the state. In January, West Virginia said it would no longer do business with asset management giant BlackRock due to its commitment to ESG and climate change concerns.

In a more visible case, Florida eliminated Disney World’s special tax district status after the company criticized a new Florida law that would restrict discussion of sexual orientation matters in the state’s schools.

Whether or not ESG concerns will be further hobbled by legislation remains to be seen. What is happening now, however, is more serious. Investor enthusiasm for ESG funds is waning. Inflows to ESG funds fell by 36% in the first quarter of this year. The decline continued in April, and in May, money flowed out of ESG funds.

Bryan Junus, the Chief Analyst for The Corporate Citizenship Project, questioned if these outflows demonstrated that the investors are becoming increasingly skeptical of ESG claims made by companies and asset managers.

“Many investors, regardless of politics, are waking up to the fact that asset managers such as Blackrock and the proxy advisors such as ISS who they rely on are not always considering the interest of bettering the planet or maximizing returns as they formulate ESG ratings and strategies. They know they’re not getting the result they want either in returns or in social impact. Investors are being told they’re getting a special secret sauce from the chef — the only problem is the sauce tastes terrible.”