How a GOP-controlled House will attack ESG and corporate climate change strategy

Republicans hoping that red-state campaigns against green investing might go national as their party takes over Congress next month may be in for a disappointment.

Incoming House Financial Services chairman Patrick McHenry, a North Carolina Republican, gave no indications he plans to push a federal version of new state laws designed to isolate firms that focus on so-called ESG investing, which emphasizes the environmental, social or corporate governance records of companies they invest in, when he spoke at the recent CNBC CFO Council Summit in Washington. D.C. to an audience of top chief financial officers from companies across the market.

He also pushed back against being characterized as a “vocal opponent” of ESG.

“I don’t think that’s a proper characterization of my view,” McHenry said in an interview with CNBC Senior Congressional Correspondent Ylan Mui. He is concerned about corporations leaning into politics and potentially away from a focus on the bottom line for shareholders and beneficial owners, “and they are doing so for the sake of Washington regulatory permission. What I think corporations should do is focus on their key knitting,” he said.

States led by Texas and West Virginia have passed laws that purport to ban state agencies from doing business with financial firms that “boycott” fossil fuels. The world’s largest money managers including BlackRock and State Street Global Advisors have been under pressure from the right wing and last week testified in Texas about ESG and climate investments. Vanguard Group also had been scheduled to testify, but after the fund giant abandoned an investment industry climate alliance, that changed.

McHenry, rated as one of the most moderate House Republicans by non-profit GovTrack US, doesn’t seem interested in the state approach. 

Instead, he said, he’ll focus on oversight of a pending Securities and Exchange Commission rule that is set to force companies to make detailed disclosures about greenhouse gas emissions in their operating business, their use of electricity from carbon-burning sources like coal and natural gas, and emissions produced when people and other companies use their products.

“Some legislation being kicked around is misguided,” McHenry told CFOs. “It plays politics with corporations, in the name of having corporations not play politics.”

But there is legislation on Capitol Hill sponsored by some Republicans that would take an approach similar to the state actions.

The “No ESG at TSP” Act, sponsored by Texas Republican Chip Roy, would prohibit TSP from allowing participants to invest their retirement savings in funds that make investment decisions based on environmental, social, governance, or political criteria, according to Roy’s office. TSP is the largest defined contribution plan in the world and benefits federal employees and military service members.

All of the initial cosponsors of Roy’s bill are members of the House Freedom Caucus, a group of about 40 of the chamber’s most ardent professed conservatives, who are engaged in a battle with Republican Leader Kevin McCarthy over who will be Speaker when the party takes over the House in January. A bill by the same name has been introduced in the Senate by Utah’s Mike Lee, whom the right-wing interest group Heritage Action rates as 22% more conservative than the average Senate Republican.

Roy did not respond to multiple requests for comment. His bill co-sponsor, South Carolina congressman Ralph Norman, provided a statement to CNBC, saying, “While it’s our hope that we crack down on this ESG nonsense, incoming-Chair McHenry will decide the direction the committee takes. Ultimately, we need severe oversight, first and foremost, and to stop all the other ridiculousness coming from this Administration in our Committee’s jurisdiction – including ESG.”

McHenry emphasized that he supports many parts of ESG, singling out its emphasis on responsible corporate governance, which he said does “have a significant bearing on economic outcomes.”

The House Financial Services Committee is leading inquiries into bankrupt crypto company FTX, which has been described by its own new CEO John Ray as a “complete failure” of governance. McHenry cited the fact that FTX had no board of directors. “Governance does matter, but when we get into the question of environment policy, it’s necessary for Congress to tackle climate change,” McHenry said at the CNBC event. “That doesn’t put me in opposition to governance standards or sustainability generally.”

On climate change, McHenry said it’s not primarily corporations’ job to lead the fight: Instead, he said, leadership should come from Congress and other policy makers.

“It’s necessary for Congress to tackle climate change, rather than regulation that foists onto large corporations to carry out what Congress should carry out,” said McHenry, whose career voting record on climate issues is rated as 6 out of 100 by the League of Conservation Voters.

McHenry is critical of the SEC’s proposed rule, and said oversight of the SEC’s implementation of the standard will be a focus of the committee. “The primary role for climate response should be driven by public office holders. … The SEC needs severe oversight, real oversight, in response to what the SEC is trying to implement very quickly,” he said.

SEC spokeswoman Aisha Johnson declined to comment on timing of regulatory items, but said that on average rules like this can take 18 to 24 months to move from proposal to final adoption. The commission reopened the public comment period on the rules in October.

A Democrat on the committee said McHenry’s oversight risks doing what the chairman criticized: Interfering with the movement of capital in the private sector toward mitigating climate change. And he described the forthcoming rules as a down payment on rules letting investors know more about the environmental risks of companies they invest in.

“That is a pro-market solution, that is a pro-transparency solution,” said Sean Casten, a a Democratic congressman from Illinois and former clean energy entrepreneur and CEO who co-authored the legislation that directed the SEC to draft the forthcoming rule. “If we decide First Solar is ‘woke,” and Exxon is not, we’re condemning the Thrift Savings Plan to crappy [long-term] returns,” he said.