A GOP-led congressional oversight committee concluded its second week of hearings July 18 during what some Republicans have dubbed "ESG Month" — a focused effort to flesh out key concerns over environmental, social and governance investment and regulatory policies and to vote on more than a dozen bills.

Seven hearings featuring sharply divided Republicans and Democrats have been held, including two focused on whether proxy advisory firms influence shareholder votes and one exploring if ESG investment criteria drive up housing and insurance costs.

"It makes it more difficult for companies to run their business when you convert them into political platforms, and the [US Securities and Exchange Commission] long understood this," James Copland, director of legal policy for the think tank Manhattan Institute, told lawmakers July 12. "You're going to hurt the returns for the average investor."

The argument that ESG investment criteria are bad for investors has not been as convincing as anti-ESG campaigners may have hoped.

In 2023, states have introduced more than 165 bills seeking to bar ESG considerations from corporate investment decisions. At least half of those bills had failed as of late June, and others were modified to have less of an impact on banks and taxpayers. Anti-ESG legislation introduced in Congress is likely doomed because it cannot move past the Democrat-controlled Senate to President Joe Biden's desk.

GOP leaders "started out by saying that it wasn't just about sending the message, but it really is," Josh Lichtenstein, a partner with the law firm Ropes & Gray, said in an interview. "The arguments that they are putting forward are probably meant more to create this sort of David vs. Goliath narrative that pro-ESG forces are really controlling the market and that people with contrary views are getting wiped out, but I don't think that actually matches the reality."

In recent days, members of the House Financial Services Committee have introduced legislation allowing companies to exclude ESG-focused shareholder proposals, another bill that would make it more difficult for shareholders to resubmit such proposals, and yet another directing the SEC to study the impact of European environmental sustainability mandates on US businesses with operations overseas. Many more bills are in the works.

Heidi Welsh, founder and executive director of the Sustainable Investments Institute (Si2), said the GOP "messaging bills" are part of a broader campaign that has thus far largely failed to gain traction.

"There's a whole lot of money going for this, but mainstream capital market sentiment does not support burning down the house," Welsh said in an interview.

Federal Reserve 'not a climate policymaker'

At a July 18 committee hearing, Republican lawmakers grilled officials from the Federal Reserve board of governors, the US Treasury Department, the Federal Deposit Insurance Corp. and the National Credit Union over their work with banks to identify climate risks.

The agency officials told lawmakers during the 2 1/2-hour hearing that they are required to consider any risks that the US banking system might face, including climate risks, but that they do not tell banks how to allocate their lending.

"Because climate change could pose challenges to the financial system, it is important that we evaluate whether banks operate in a safe and sound manner and manage all material risk, including climate risks," Michael Gibson, supervision and regulation director for the Federal Reserve's board of governors. "The Federal Reserve is not a climate policymaker."

GOP lawmakers were not convinced.

"When a regulator comes in and says, 'We're really focused on climate-related risks,' that sends a message: 'Don't lend to carbon-intensive industries,'" Rep. Andy Barr, a Kentucky Republican and chair of the committee's Subcommittee on Financial Institutions and Monetary Policy, said at the hearing. "That's what we're concerned about."

Democrats questioned why the Republican House majority would focus on ESG and question climate risk assessment.

"Chairman, what are we doing here?" Rep. Jim Himes (D-Conn.) asked committee chair Patrick McHenry, a North Carolina Republican, when the hearings kicked off July 12. "We've had bank failures. We're working in great bipartisan fashion on cryptocurrency regulation. ... We've got so much to talk about, and here we are devoting a week to telling private corporations that they're mad for exercising the rights they have in a free market. It is mind-blowing to me."

Anti-ESG campaign has chilling effect

Even if Congress fails to pass legislation targeting ESG policies, the debate in Congress could filter down to states that are looking for new ways to go after investment firms, for example by raising antitrust concerns, Lichtenstein said. Republican state attorneys general recently had some success with that after alleging potential illegal collusion among insurance companies participating in the United Nations-led Net-Zero Insurance Alliance. More than a dozen firms promptly left the alliance.

On July 6, GOP members of the House Judiciary Committee sent letters to BlackRock Inc., Vanguard Group Inc., State Street Corp. and heads of the Glasgow Financial Alliance for Net Zero requesting information the committee said might shed light on such industry collusion in violation of antitrust laws.

Agreements to decarbonize investment portfolios and to reach net-zero greenhouse gas emissions by 2050 "would require draconian declines in the use of coal, oil and gas," the lawmakers wrote, citing International Energy Agency forecasts. "The potential consequences for American freedom and economic well-being are far-reaching."

Inquiries like these help explain why corporate America is adjusting its messaging and, in some cases, tweaking practices around ESG to avoid getting targeted and possibly losing business, market observers said. On July 17, for example, BlackRock extended what it calls "voting choice" to retail investors in its largest exchange-traded fund.

The move was an obvious reaction to criticism over its sustainability policies and market influence, said Jill Fisch, a University of Pennsylvania law professor. Corporate America, however, will continue to pay attention to all business risks and opportunities, Fisch added.

"There's a lot of stuff that is financially material and economically important for a lot of companies, whether you call it ESG or not," Fisch said in an interview. As an example, she noted the risks that car manufacturers might face if they continue to invest in gasoline cars amid tightening emission reductions.

"I don't think ESG is over and done with," Fisch said.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.