House Oversight Committee echoes Judiciary Committee ESG saber-rattling in letter to the Fed

Representative James Comer (R-KY), Chair of U.S. House Committee on Oversight and Accountability, sent a February 26, 2024 letter to the General Counsel of the Federal Reserve Board as part of the Committee’s “ongoing review of the integration of environmental, social, and governance (ESG) policies across the U.S. economy.”  

The ultimate intended target of the letter is self-evidently the asset managers that participate in climate-related industry initiatives, such as Climate Action 100+ and the Net Zero Asset Managers Initiative (NZAM).  The Committee’s theme mirrors that of the House Judiciary Committee investigation of supposed antitrust violations growing out of the firms’ participation in the same initiatives.  

But the Oversight Committee’s jurisdiction is focused on the activities of government entities, not private financial institutions – so what is its hook?  Instead of challenging the managers directly, the February 26 letter second-guesses the Fed’s regulation of them.  

The Committee pointedly questions the Fed’s earlier determination that relatively large holdings of a bank’s stock by mutual funds and separate accounts with a common adviser would not cause the adviser to be deemed to “control” the bank under various statutes.  The letter suggests that, for these purposes, the Fed should treat these advisers as “work[ing] in concert with other market players to bring about policy changes” at their common portfolio companies, such that they collectively exert more control over banks than the Fed’s determination assumed.     

Nevertheless, despite taking different routes to get there, the Oversight and Judiciary Committees sound the same theme, based on the same false premise.  Both panels take it as a given that climate initiative participation compels concerted action by asset managers, for the purpose of furthering a climate agenda rather than maximizing portfolio returns.  

They claim to support this theory through selective quotes from the initiatives’ websites, imputing these statements to managers.  But as often as Republican officials may repeat this mantra, it doesn’t make it true, especially when the real world evidence is to the contrary.  

In reality, managers consistently reiterate and demonstrate that their integration of ESG factors in investment decisions, proxy voting and engagement efforts is grounded in financial materiality and the pursuit of long-term value creation, and that they pursue these goals independently from other managers.  For example, managers’ demonstrably disparate voting records on climate-related shareholder proposals in no way suggests that they are aligning their decisions on these measures, or that they reflexively support proposals that would prescribe reductions in carbon emissions by portfolio companies.

What will be the result of these Congressional inquiries?  It’s important to bear in mind that neither legislative committee has direct enforcement authority to initiate the ESG-related legal claims it posits.  Just as the Judiciary Committee can’t force the hand of the Department of Justice or Federal Trade Commissions to assert antitrust violations, so too the Oversight Committee can’t compel the Fed to backtrack on its determinations regarding “control” of banks by mutual fund sponsors.  And there is no indication to date that these federal regulators give any credence to the “climate cabal” hypothesis underlying the House committee attacks on ESG investing practices.  

This is not to say that there will be no practical impact from the committees’ anti-ESG crusades.  The Congressional subpoena power means that legislators can continue to impose large legal costs, demanding expansive document productions and high-profile testimony in an effort to generate headlines and accompanying public pressure. 

Nevertheless, it continues to seem very unlikely that these efforts will ultimately yield any real-world support for the premise that climate initiative participation results in coercive collective action in pursuit of an agenda other than maximizing returns.

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