Republican midterm victory could lead to ‘gridlock’ for ESG rulemaking initiatives

A senior Republican lobbyist and former Trump policy aide has predicted success for the party in Tuesday’s midterm elections will lead to more “noise” in the near term on ESG, but will not jeopardise rulemaking in the short term as Republicans in Congress will prioritise laying the ground for 2024 and beyond.

Speaking at an event hosted by Jefferies, Michael Catanzaro, president and chief policy officer at lobbying group CGCN, said investors could expect Republicans to make use of “investigations, appropriations and the Congressional Review Act” in an attempt to slow the ESG rulemaking process.

While Republicans may also look to introduce their own bills, Catanzaro described this as “ESG-related hand waving” and said that any actions taken will be in preparation for a possible Republican presidency in 2024.

However, he noted that state attorneys general will keep ESG as a high priority, looking to generate court cases.

In the latest development in ongoing legal posturing, five Republican senators led by Arkansas senator Tom Cotton wrote to 51 law firms on Friday last week, warning that their clients may be committing antitrust violations by taking part in collaborative ESG initiatives. The letter threatens Congressional investigation of ESG practices and tells the law firms to preserve relevant documents.

Catanzaro, who has held a number of political policy roles and spent a year as special assistant to the president for domestic energy and environmental policy, was also critical of Republican understanding of ESG. He said it was often conflated with attempts to defund oil and gas, and that Republicans needed to improve their understanding. He argued that, following the midterms, the party needs “to be strategic” both about establishing its position and deciding “how and why” ESG will be targeted.

Charles Boakye, an ESG strategist at Jefferies, said he agreed with Catanzaro’s analysis. He told Responsible Investor that Republican messaging suggested they would look to “gridlock” ESG regulation efforts in the hopes of a victory in 2024. While many elements of the Inflation Reduction Act have bipartisan support and so would be unlikely to see meaningful alteration or reversal, the fate of the SEC’s climate disclosures proposal remains unclear, Boakye said.

“The midterms could be significant from the perspective of advancing ESG related policy, however the threat of reversal of existing policy only increases post-2024 should the Democrats lose the White House,” he continued.

Democrats organise a fightback

While the momentum is on the side of anti-ESG Republicans, Democrat politicians have not been idle in organising a fight-back. Documents obtained by RI under freedom of information laws show more details of a July conference convened by state treasurer network For the Long Term, looking to set out a strategy to push back against anti-ESG movements.

The treasurers for Massachusetts, Illinois, Washington and Colorado were joined by New York City comptroller Brad Lander and former North Carolina state treasurer Janet Cowell at the office of a New York law firm. Also invited were representatives from Ceres, the US Impact Alliance, private investor Vistria and insurer Ullico.

Attendees heard from polling company GQR Research as well as an analysis of anti-ESG messaging and lessons learned from critical race theory – a school of thought which posits that US institutions are inherently racist and has also come under legislative and political attack from Republicans – before moving into a discussion which sought to create a set of “guiding principles” for state Democrats.

According to a copy of the agenda, the group then held discussions over lunch on how to move beyond reactive measures to Republican efforts against ESG. The three-hour afternoon session was spent discussing “strategic initiatives”, including engaging investment managers and rallying more treasurers and comptrollers to the cause.

Action since the July summit has been somewhat muted, as comptrollers and treasurers have focused efforts on elections.

However, the group did lay out its stall in mid-September, with a statement signed by 13 state comptrollers, as well as New York City’s Lander, which said anti-ESG states would miss out on potential growth and fail to compete over the longer time horizon. Lander has also stepped up his engagement with BlackRock, raising the possibility of the city’s five pension funds pulling their money if the manager fails to take stronger action on climate.

Lander, who is not up for election this year, told RI that anti-ESG legislation was deeply troubling and misguided. “The actions we are seeing from many leaders in red states are dangerous, short-sighted tactics that harm residents in the long run,” he continued.

His comments were echoed by Anne Kelly, vice president of government relations at Ceres, who said the moves “will serve only to harm beneficiaries and employees as well as the economy at large”.

Efforts to undermine climate aware investing are an overreach by policymakers, Kelly continued, adding: “If newly elected lawmakers decide to pursue oversight hearings on this issue, they are likely to learn that institutional investors and major companies alike take a range of material risk factors, including the risk of climate change, into account as they make various business and investment decisions.”