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April 8, 2019 TO: Global ESG Task Force RE: Summary of US Senate Banking Committee Hearing on April 2
The Senate Banking Committee recently conducted an ESG-related hearing titled “The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries.”[1] The hearing particularly focused on ESG-related shareholder proposals and the proxy voting process.
Committee members present:
- Mike Crapo, R-ID, Chairman
- Mike Rounds, R-SD
- Thom Tillis, R-NC
- Patrick Toomey, R-PA
- Sherrod Brown, D-OH, Ranking Member
- Brian Schatz, D-HI
- Chris Van Hollen, D-MD
Witnesses:
- The Honorable Phil Gramm, Former United States Senator
- Mr. James R. Copland, Senior Fellow and Director of Legal Policy, Manhattan Institute
- Mr. John Streur, President and Chief Executive Officer, Calvert Research and Management
Senate Banking Committee Chairman Crapo (R-ID) opened the hearing, stating that it is critical to ensure that retail investors understand the use of a proxy advisor or asset manager’s investment policies, and that retail investors’ interests should be reflected in how institutional investors vote shares. He also noted that ESG proposals were the largest category of shareholder proposals in the 2018 proxy season.
Two of the witnesses, Former Sen. Gramm and Mr. Copland, expressed concern about the increasing role of institutional investors in capital markets. Former Sen. Gramm argued that index funds have a conflict of interest, in that the public perception of a fund’s voting record can affect the marketing of a fund. He also argued that the increase in index fund holdings has increased the power of ESG activists and suggested that the SEC require index funds to poll their investors.
The third witness, Mr. Streur, emphasized the importance of financial materiality in evaluating ESG-related information.
Sens. Rounds (R-SD) and Toomey (R-PA) pushed for an increase to the ownership threshold that qualifies a shareholder to offer a proposal. They suggested that shareholder proposals can use up valuable corporate resources on issues that are not related to maximizing shareholder returns.
Ranking Member Brown (D-OH), however, expressed support for greater disclosures and investor participation, suggesting that human capital investments and other issues do have an impact on a company’s long-term viability. He noted that actions related to climate, gun violence, and the environment can increase returns. He was joined by Sen. Schatz (D-HI) and Mr. Streur on that point.
Sens. Tillis (R-NC) and Toomey (R-PA) disagreed and were supported by Mr. Copland, who cited a study showing that the NY State Common Ownership Retirement Fund’s ESG shareholder proposal activity was negatively related to firm value.
Separately, the House Financial Services Committee (chaired by Maxine Waters, D-CA) had planned to hold a hearing on ESG-related issuer disclosure on March 26, titled “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures.” That hearing has been postponed, and we will notify you as soon as a new date is set.
Linda M. French
Assistant Chief Counsel, ICI Global
endnotes
[1] The official hearing description is available at https://www.banking.senate.gov/hearings/the-application-of-environmental-social-and-governance-principles-in-investing-and-the-role-of-asset-managers-proxy-advisors-and-other-intermediaries.