By John Filar Atwood
Americans for Financial Reform (AFR) strongly opposes the package of ESG-focused legislation put forward by the House Financial Services Committee, which held its markup of the bills today in the culmination of what Republican committee members had dubbed “ESG month.” AFR decried the committee’s “zeal to discredit ESG considerations,” saying that the proposed legislation will weaken investor protections, reduce transparency, and make it harder for shareholders to hold corporations accountable.
ESG has become a highly politicized issue, but in his opening statement at this morning’s markup Committee Chair Patrick McHenry (R-NC) said “this is not about injecting our own politics into businesses. It’s about getting politics out altogether.” The proposals were developed by the committee’s ESG Working Group, which describes its objective as “developing a policy agenda designed to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans.”
In all, the legislative effort involves 18 bills that have been rolled up into the following proposals: the Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act (H.R. 4790); the Protecting Americans’ Retirement Savings from Politics Act (H.R. 4767); the American Financial Institution Regulator Sovereignty and Transparency Act (H.R. 4823); and the Businesses Over Activists Act (H.R. 4655).
AFR voiced its opposition to the proposals in a letter that echoes the group’s July 11 communication to the committee’s leadership. The new letter addresses in greater detail the specific bills being advanced by the committee, and expresses the group’s views that the legislation would weaken investor protections and insulate management from accountability.
Weaker investor protections. Starting with the GUARDRAIL Act, AFR noted that it would require the SEC to “expressly provide” within each of its disclosure rulemakings that disclosures are required only “to the extent that the issuer has determined that such information is material with respect to a voting or investment decision regarding the securities of such issuers.” If enacted, AFR believes the legislation would functionally make all SEC disclosure requirements discretionary and would statutorily limit the ability of the SEC or investors to scrutinize materiality determinations by issuers.
AFR said that issuer-determined materiality has often yielded incomplete and incomparable information for investors. Basing the entire SEC disclosure regime on this principle would be “disastrous,” in AFR’s opinion.
The bill also proposes to require the SEC to have a public list of all its legal mandates and regulations that require disclosure of “non-material” information, along with an explanation of why that disclosure is required. In addition, it would prohibit private lawsuits against entities that fail to disclose “non-material” information.
AFR argued that this provision will minimize a company’s responsibility to disclose information investors need to make better decisions about their investments by requiring the SEC to engage in an unnecessary and wasteful exercise. The bill would also close an avenue for investor accountability, according to AFR, by prohibiting private lawsuits over “non-material” information that is important for investor protection.
The bill proposes to amend the 1934 Act to establish within the SEC a new public company advisory committee that would exclusively represent the interests of the management of public companies within the SEC. AFR believes this provision’s core goal is to increase the influence that top executives of public companies have on the SEC. The proposed committee is unnecessary, it said, and is at odds with the Commission’s three-part statutory mission.
Regarding the bill’s proposal to require the Government Accountability Office to conduct a study on the “detrimental impact” of the Directive on Corporate Sustainability Due Diligence and the Corporate Sustainability Reporting Directive on U.S. companies, AFR noted that the provision takes aim at the idea that companies should be accountable to social and environmental issues more broadly. In opposition, AFR cited a 2023 Fortune article which found that “Most voters (76%) feel companies play a vital role in society and should be held accountable to make a positive impact on the communities in which they operate. This finding is consistent across political lines, with both the majority of Republicans (69%) and Democrats (82%) in agreement.”
Insulating management. AFR opposes the package of 11 bills that have been compiled into the Protecting Americans’ Retirement Savings from Politics Act, which targets the shareholder proposal process, proxy advisory firms, and asset managers. AFR said that in general the legislation demonstrates a hostility toward investors’ ability to use their rights as shareholders, and a desire to insulate management from investor input and accountability.
Regarding shareholder proposals, the bill would require the SEC to significantly increase the percentage of votes a shareholder proposal must obtain in order for a proposal that “address[es] substantially the same subject matter” to be resubmitted for consideration within five years. It also would nullify a pending SEC rule that seeks to clarify the circumstances under which the Commission may allow a company to exclude a shareholder proposal from its proxy statement.
The legislation specifically targets ESG proposals, providing that public companies would be allowed to exclude proposals if they are about “environmental, social, or political (or a similar subject matter)” issues. Finally, the bill would allow companies to exclude proposals “without regard to whether [it] relates to a significant policy issue.”
AFR’s objects to these proposals because they would make it more difficult for shareholders to have their voices heard by management, thereby damaging the role shareholder proposals play in identifying, raising awareness, and addressing risks at public companies. In addition, AFR noted that the SEC currently has rules pending that would make the process by which the SEC determines whether to allow a company to exclude a shareholder proposal from its proxy statement more efficient, objective, and predictable. As for the specific provision to allow companies to exclude ESG-related shareholder proposals, AFR called the idea “an affront to investors and their role in our corporate governance system.”
Proxy advisory firms. The Protecting Americans’ Retirement Savings from Politics Act also rolls in bills that would provide for registration of proxy advisory firms, provide for liability for certain failures to disclose material information in connection with proxy voting advice, and prohibit voting automatically based on the recommendations of a proxy advisory firm or pre-populating votes on a proxy advisory firm’s electronic platform with the proxy advisory firm’s recommendations without independent review and analysis.
AFR believes the bill would result in management inappropriately influencing what are supposed to be independent recommendations that proxy advisory firms give to their clients. Part of the bill would allow companies to sue proxy advisory firms if they recommend voting in favor of shareholder proposals later found to be illegal, AFR noted. According to AFR, this appears to reference recent threats by Republican Attorneys General to seek legal action against companies engaging in diversity, equity, and inclusion efforts. In AFR’s view, the legislation would inappropriately influence proxy advisory firms’ advice to clients about shareholder proposals related to diversity, equity, and inclusion.
Regarding the proposal to provide for liability for certain failures to disclose material information in connection with proxy voting advice, AFR said this provision is designed to intimidate proxy advisory firms into siding with management more often by increasing their exposure to liability. AFR noted that while the Business Roundtable and other management groups have often claimed that proxy advice is rife with errors, there is little evidence that supports that claim.
In general, AFR said that it strongly supports policies that seek to establish an effective and standardized framework for the disclosure of ESG information under federal securities laws. Protecting investors demands that investors have access to the data they need to make informed choices and hold companies they own accountable, including with respect to ESG factors, the group stated.