Parallel ESG Investigations: Reading the Congressional Tea Leaves
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Parallel ESG Investigations: Reading the Congressional Tea Leaves

Brownstein Client Alert, May 15, 2023

Congress’ intent to collaborate with state attorneys general could not get much clearer.

In March 2023, Brownstein’s ESG and State Attorneys General teams noted there were clear signals that congressional investigations were on the horizon. Reinforcing that prediction, the House Committee on Oversight and Accountability held a May 10 hearing titled, “ESG Part I: An Examination of Environmental, Social, and Governance Practices with Attorneys General.”

Alabama Attorney General Steve Marshall, Utah Attorney General Sean Reyes and Illinois State Treasurer Michael Frerichs all testified before the committee. The discussion focused on fiduciary responsibility, market changes, anti-ESG efforts and overall ESG impacts.

Opening remarks were indicative of the deepening political divide surrounding ESG. Chair James Comer (R-KY) opened the hearing by citing concerns that asset managers and shareholders are pushing a political agenda through ESG pledges. Ranking Member Jamie Raskin (D-MD) countered by noting that responsible investing principles, including ESG, have been freely chosen by asset managers for decades. He added that anti-ESG laws threaten the savings and retirement of Americans by forcing asset managers to ignore material risks and violate their fiduciary duties.

This hearing yielded at least three notable insights: (1) witnesses articulated several legal bases to launch investigations; (2) underlying factual disputes crystalized; and (3) companies should expect further activity and prepare accordingly. Below, we expand on each of these takeaways.

1. Potential Legal Grounds for Parallel Investigations Laid Bare

In response to questions from Rep. Lauren Boebert (R-CO), Utah Attorney General Reyes said asset managers signing ESG pledges could violate federal law, state consumer protection laws, state securities laws and common law contract principles. Additionally, Alabama Attorney General Marshall, in response to questions from Rep. Russell Fry (R-SC), said asset managers have a fiduciary duty to maximize return on investment and consideration of subjective ESG criteria would violate state law. Later in the hearing, Marshall reiterated that state-level consumer protection and antitrust principles are implicated.

Taken together, the foregoing remarks from Reyes and Marshall highlight several bases for state attorneys general to launch ESG investigations. Likewise, Congress has its own independent authority to initiate investigations. Indeed, Congress has already shown a willingness to investigate and legislate on ESG issues when both chambers passed a bill (which President Joe Biden vetoed) overturning a Labor Department rule making it easier for fund managers to consider ESG in investment decisions.

2. Underlying Factual Disputes

One factual dispute highlighted by the hearing is the financial impact of ESG investing versus anti-ESG laws. When Rep. Clay Higgins (R-LA) asked how ESG investments compare to traditional investments, AG Reyes referenced a study finding over the past five years that ESG funds underperformed compared to the broader markets by more than 25% per year. On the other hand, Illinois State Treasurer Frerichs said during his testimony that not being able to access ESG-related financial information is akin to investing with a blindfold on and that anti-ESG laws could cost billions in taxpayer money. He specifically cited reports from Illinois, Kansas and Kentucky of increased costs to comply with anti-ESG laws. When asked by Rep. Maxwell Frost (D-FL) about why anti-ESG laws are facing backlash even in Republican states, Frerichs said it was likely because they are anti-free market and cost taxpayers significantly.

One factual assertion stands out as the type of statement that could trigger additional congressional scrutiny. In response to a question from Rep. Gary Palmer (R-AL) about whether a U.S. emphasis on ESG empowers China, AG Marshall said yes. He pointed out as an example that China is not tied to the international Paris Climate Agreement, which affords them an unfair competitive advantage and access to cheap energy. Given heightened tensions with China, AG Marshall’s statement could likely exacerbate congressional concerns surrounding the impact of ESG.

3. Companies Should Prepare Accordingly: Additional Action Foreshadowed

One of the hearing’s more notable moments came when Rep. Kelly Armstrong (R-ND) asked whether robo-voting (the practice of investment managers automatically voting in line with the recommendations of proxy advisory firms) magnifies the power of proxy advisors and whether Congress should restrict the practice. AG Reyes responded by noting that in his view robo-voting has indeed given more power to proxy advisors and that he and other state attorneys general would like Congress to review this practice at a future hearing. AG Marshall agreed, adding that consumer protection laws and antitrust laws help on the state level, but congressional action would make a difference. The two made clear that Republican state attorneys general will strongly encourage congressional action to limit ESG impacts.

Finally, as the “Part I” in the hearing’s name makes clear, more congressional scrutiny of ESG is expected. Companies should proactively prepare for a “Part II” and the increasing likelihood of congressional collaboration with state attorneys general on the matter. Two months ago, we outlined three concrete steps to prepare for parallel investigations from Congress and state attorneys general. Given the potential activity foreshadowed in this hearing, companies should consult counsel with a cross-disciplinary understanding of ESG and experience navigating both state attorneys general and Congress.

This document is intended to provide you with general information regarding parallel ESG-related investigations from Congress and state attorneys general. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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