`[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]



                     PROTECTING INVESTOR INTERESTS:
                      EXAMINING ENVIRONMENTAL AND
                 SOCIAL POLICY IN FINANCIAL REGULATION

=======================================================================




                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                             JULY 12, 2023
                               __________


       Printed for the use of the Committee on Financial Services


                           Serial No. 118-37






                           
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                                 ______

                    U.S. GOVERNMENT PUBLISHING OFFICE

53-376 PDF                  WASHINGTON : 2024



























                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                   Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
  Chairman                           JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
























                     
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 12, 2023................................................     1
Appendix:
    July 12, 2023................................................    53

                               WITNESSES
                               
                        Wednesday, July 12, 2023

Allen, Ted, Vice President, Policy & Advocacy, Society for 
  Corporate Governance...........................................     5
Copland, James R., Senior Fellow and Director, Manhattan 
  Institute for Policy Research..................................     6
Cunningham, Lawrence A., Special Counsel, Mayer Brown LLP........     8
Ellison, Hon. Keith, Attorney General, State of Minnesota........    11
Zycher, Benjamin, Senior Fellow, American Enterprise Institute...     9

                                APPENDIX

Prepared statements:
    Allen, Ted...................................................    54
    Copland, James R.............................................    65
    Cunningham, Lawrence A.......................................    85
    Ellison, Hon. Keith..........................................    98
    Zycher, Benjamin.............................................   102

              Additional Material Submitted for the Record

Himes, Hon. Jim:
    Written statement of Green America...........................   119
    Written statement of the Interfaith Center on Corporate 
      Responsibility.............................................   125
    Written statement of Out Leadership..........................   126
    Written statement of the Shareholder Rights Group............   132
Waters, Hon. Maxine:
    Better Markets Fact Sheet....................................   138
    Written statement of Principles for Responsible Investment...   147
    Letter from various investors................................   154
    Letter from various undersigned organizations................   157
Copland, James R.:
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   163
    Written responses to questions for the record from 
      Representative Ogles.......................................   163
    Written responses to questions for the record from 
      Representative Waters......................................   166
Cunningham, Lawrence A.:
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   168
    Written responses to questions for the record from 
      Representative Ogles.......................................   174
    Written responses to questions for the record from 
      Representative Waters......................................   177
Zycher, Benjamin:
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   178

 
                     PROTECTING INVESTOR INTERESTS:
                      EXAMINING ENVIRONMENTAL AND
                 SOCIAL POLICY IN FINANCIAL REGULATION

                              ----------                              

                        Wednesday, July 12, 2023

                         U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:09 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the committee] presiding.
    Members present: Representatives McHenry, Sessions, 
Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, Hill, 
Emmer, Loudermilk, Rose, Steil, Timmons, Norman, Meuser, 
Fitzgerald, Garbarino, Kim, Donalds, Flood, Lawler, Nunn, 
Houchin, Ogles; Waters, Sherman, Scott, Lynch, Cleaver, Himes, 
Foster, Beatty, Vargas, Gottheimer, Casten, Horsford, Tlaib, 
Garcia, Williams of Georgia, Nickel, and Pettersen.
    Chairman McHenry. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Protecting Investor 
Interests: Examining Environmental and Social Policy in 
Financial Regulation.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    We are here today to ensure U.S. markets remain healthy, 
vibrant, and the envy of the world. This year, our committee 
has found bipartisan agreement on solutions to strengthen our 
public markets and increase opportunities for all investors. I 
hope we can continue that constructive work today.
    Unfortunately, we have seen a disturbing trend in the Biden 
Administration's approach to regulating our capital markets, 
particularly the Securities and Exchange Commission (SEC). 
Rather than focusing on sound financial regulation, the SEC has 
turned its attention towards non-material environmental, 
social, and political issues. This misguided approach has led 
to increased costs and burdens for those participating in the 
U.S. public markets. These politically-motivated regulations 
not only discourage private companies from going public, but 
also hinder the competitiveness of American public companies. 
The everyday investors who rely on financial returns for their 
retirement savings bear the brunt of these consequences.
    Today, we will discuss a slate of proposals that provide 
common-sense solutions to strengthen our public markets. To be 
clear, these are not about delivering a message. They are about 
making a difference and making a meaningful change to protect 
investors and ensure our markets remain robust and competitive.
    First, we must make necessary reforms to the proxy process 
to restore its efficiency and promote long-term shareholder 
value. We must prevent shareholder activism from diverting 
attention and resources away from the core issues at hand. To 
be clear, I support shareholder democracy, but it should be 
their say, not external third parties who exploit the existing 
process to impose their own social and political beliefs into 
and onto American public companies. This undermines the very 
principles of democracy and transforms corporate boardrooms 
into political platforms, overshadowing sound financial 
decision-making. Ultimately, this harms everyday investors in 
our public markets.
    Second, we must address the burdensome climate reporting 
and other requirements imposed by the Biden Administration's 
Securities and Exchange Commission. The SEC has proposed a 500-
page climate disclosure rule that would replace voluntary 
sustainability reports with mandatory disclosures, and in which 
the question of materiality is really thrown out the window. 
This includes demanding detailed emissions data and climate 
risk management strategies even when that information is not 
material to the company's business or their inner workings. The 
SEC is not a climate regulator, nor has Congress authorized it 
to mandate environmental policy via the disclosure regime. In 
fact, Republicans have consistently voiced concerns with a 
multitude of existing disclosures imposed by the SEC, and 
emphasized the need for simplification rather than added 
complexity.
    Finally, many on the left have raised concerns that we are 
not keeping up with our European counterparts in addressing 
environmental and social issues. They argue we should mirror 
the European approach rather than protecting our interests from 
the extraterritorial reach of foreign regulators. We won't 
allow European bureaucrats to dictate these priorities because 
they have been unable to legislate them here in the United 
States on the wider economy and the wider populace. What this 
really comes down to is international competition. We will not 
be able to maintain our standing as the world's most-envied 
capital markets by taking misguided cues from other countries.
    The legislative proposals before us today aim to tackle 
these issues head on. It is time to get politics out of 
corporate boardrooms and discourage financial regulation from 
being weaponized to drive far-left environmental and social 
policy. By doing so, we can ensure that our markets remain 
competitive and enable American companies and workers to 
thrive.
    I yield back, and the Chair now recognizes the ranking 
member of the committee, the gentlewoman from California, Ms. 
Waters, for 4 minutes for an opening statement.
    Ms. Waters. Thank you very much, Mr. Chairman. Good 
morning.
    Today's hearing marks the beginning of a month-long 
Republican offensive to feed the daily outrage machine of Fox 
News and its extreme MAGA Republican allies. This House-wide 
effort is meant to divide Americans by ripping freedoms, 
rights, and opportunities away from women, people of color, and 
members of the LGBTQ community. That is the true meaning of the 
term, ``anti-woke,'' and that is what today's hearing is really 
about. But none of this should come as a surprise to those of 
us who follow the work of this committee.
    In January, after assuming the Majority, Republicans gutted 
Congress' first-ever Diversity and Inclusion Subcommittee, a 
subcommittee I established in 2019. Since then, and despite 
promises made by the Chair, Republicans have done absolutely 
nothing to examine racial or gender inequality in financial 
services.
    In February, the committee debated its first bill of the 
new Congress. Was it a bill to address inflation? No. Was it a 
bill to address housing affordability? Wrong again. No, that 
bill wasn't even a bill; it was a meaningless resolution 
condemning the non-existent threat of socialism in America.
    We have also had three of the largest bank failures in our 
nation's history. In response, Republicans rushed to the House 
Floor to do nothing. Instead of using Floor time to deal with 
the real crisis facing the American people, Republicans stopped 
the culture wars by using Fox News misinformation about a 
Federal Housing Finance Agency (FHFA) decision that was 
designed to increase homeownership for the middle-class, 
replacing it instead with a new, $5 billion tax on future 
homebuyers. This is why I called it the, ``MAGA Housing Scam 
Act.''
    Today is the first of six hearings this month where 
Republicans will partner with a network of dark money, climate 
deniers, and conspiracy theorists to wage their latest culture 
war against responsible investing, and divert attention away 
from what really matters in people's lives. The Republican 
effort to dismantle ESG is integral to their agenda to gut 
diversity and inclusion across-the-board. Let's not forget that 
after the failure of Silicon Valley Bank (SVB), before even 
bothering to address concerns from depositors, some Republicans 
suggested SVB failed because it had one Black board director. 
Let's set the record straight with data.
    The research clearly shows that 80 percent of investors are 
supportive of ESG information because it empowers them to do 
whatever they want with their money. That is why I say that 
instead of, ``environmental, social, and governance,'' ESG 
should really stand for, ``empowering shareholder growth.'' ESG 
isn't just about values; it is about value. Yes, investors need 
to know how companies are addressing climate risk, how they pay 
their employees, how diverse their workforce is, and more. 
Investors want this information because it is good for the 
performance of their investments, which is also good for 
society. That is as capitalist and as American as it gets. 
While I believe that the series of hearings this month is a 
terrible use of this committee's time, rest assured that 
Committee Democrats will continue to thwart this anti-
capitalist, anti-investor, anti-business, and anti-American 
effort. With that, I yield back.
    Chairman McHenry. The gentlelady yields back. I will now 
recognize the gentleman from Michigan, Mr. Huizenga, who is 
also the Chair of our Oversight and Investigations 
Subcommittee, and is the leader of this effort, for 1 minute.
    Mr. Huizenga. Thank you, Mr. Chairman. Across our country, 
investors are being held hostage by those who don't want to 
maximize retirement profits, but rather seek to push a far-left 
social and political agenda, forcing lower returns on Americans 
who are trying to build a secure financial future. It is wrong. 
This approach undermines traditional and, frankly, legal 
government structures and has turned our financial system into 
a political battlefield. But I am here to tell you that 
Americans are waking up. They are waking up to this 
Administration's assault on their retirement accounts.
    In this debate, one thing is clear: Companies have a 
decision to make. Will they stand by quietly and let 
bureaucrats in Washington drive up costs and regulatory 
burdens, ultimately harming their everyday investors, or will 
they stand up to the out-of-touch, unrealistic policies being 
pushed by this Administration? Republicans will continue to 
stand with those investors saving for retirement and their 
desire to build a more-secure future by developing policies 
that prioritize their returns, promote economic growth for all, 
enhance financial security, and safeguard our capital markets 
for all.
    Mr. Chairman, I look forward to the debate. I yield back.
    Chairman McHenry. The Chair now recognizes the gentleman 
from California, Mr. Sherman, who is also the ranking member of 
our Subcommittee on Capital Markets, for 1 minute.
    Mr. Sherman. Under capitalism, if through the sweat of 
one's brow and the frugality of one's spending, you accumulate 
capital, and you have the courage to invest it in the American 
economy, you become a shareholder. And under capitalism, the 
shareholders are entitled to the information they want, even if 
the Republican Party doesn't think they should have it. 
Shareholders should be in control, not managers who don't own 
the company. And shareholders should be able to get the 
investment advice they want, even if it is advice on how to 
improve the world, rather than earnings per share. For over 100 
years, the followers of Leon Trotsky and the Socialist Workers 
Party have waged war against this capitalist model. Today, 
elements of the Republican Party join them in that effort. 
Ronald Reagan would be ashamed.
    Chairman McHenry. The gentleman yields back.
    Today, we welcome the testimony of: Mr. Ted Allen, vice 
president of the Society for Corporate Governance; Mr. James 
Copland, senior fellow and director at the Manhattan Institute; 
Mr. Lawrence Cunningham, special counsel with the law firm, 
Mayer Brown; Mr. Benjamin Zycher, senior fellow at the American 
Enterprise Institute; and the Honorable Keith Ellison, 
Minnesota's Attorney General, and one of our former 
colleagues--welcome back to the House, it's nice to see you 
again. Keith served from 2006 to 2018, 6 terms in the House, so 
welcome back. It's good to see you. And we thank each of you 
for being here.
    You will each be recognized for 5 minutes for an oral 
presentation of your testimony. And without objection, your 
written statements will be made a part of the record.
    And we will now start with you, Mr. Allen, for 5 minutes.

      STATEMENT OF TED ALLEN, VICE PRESIDENT, POLICY &
         ADVOCACY, SOCIETY FOR CORPORATE GOVERNANCE

    Mr. Allen. Good morning, Chairman McHenry, Ranking Member 
Waters, and members of the committee. My name is Ted Allen, and 
I'm from the Society for Corporate Governance. Our members 
include 3,700 corporate secretaries and other governance 
professionals who collectively represent more than 1,000 public 
companies of almost every size and industry across the United 
States.
    I am here today to share our members' concerns about the 
shareholder proposal process, which is governed by SEC Rule 
14a-8. The original intent of Rule 14a-8, as explained by the 
SEC in 1945, was to enable shareholders to present proposals 
on, ``matters relating to the affairs of the company, but not 
on matters of a general political, social, or economic 
nature.'' Unfortunately, the SEC has strayed from its original 
intent and forced companies to include resolutions that relate 
to significant social policy issues.
    In November of 2021, the SEC issued Staff Legal Bulletin 
No. 14L, which further reduced the ability of public companies 
to exclude shareholder proposals that address significant 
public policy and social policy issues, even if they didn't 
relate to the specific circumstances of a company. Since that 
staff legal bulletin was issued, there has been a notable 
increase in the number of shareholder proposals filed. So far 
this year, there has been a record number of proposals filed, 
961, up 18 percent from 2021.
    This increase has been driven primarily by activists 
pushing environmental and social objectives. These proposals 
accounted for 62 percent of all proposal filings so far this 
year, and the number of environmental and social proposals has 
soared by 52 percent since 2021. Many of these proposals are 
overly prescriptive or not linked to long-term shareholder 
value. Some resolutions raise contentious policy issues such as 
phasing out the use of fossil fuels, which would be more 
appropriately addressed by Congress or State lawmakers.
    Our members have been besieged by proposals from across the 
political spectrum. Some companies have faced competing demands 
on climate risk or diversity policies, while others must cope 
with proposals on abortion or other controversial topics. These 
politically-inspired proposals have become an increasing burden 
on investors and companies, but for companies, in a recent 
survey of society members, nearly half of respondents said 
managing shareholder proposals is a significant time 
commitment. While costs vary by company, some companies are 
spending hundreds or thousands of dollars each year to respond 
to the demand of investors who are only required to own a 
$2,000 stake for 3 years.
    These proposals also pose a significant burden for 
investors. Some institutional investors have told our members 
that they do not have enough time to read proxy statements in 
detail. Some institutions have hired additional staff, while 
others have increased their reliance on proxy advisory firms. 
In response to these trends, the society supports the following 
reforms:
    One, rescind Staff Legal Bulletin 14L. Companies should not 
be obligated to include proposals that relate to ordinary 
business or are economically irrelevant. Two, eliminate the 
significant social policy issue exception under Rule 14a-8. 
Companies should not be forced to take sides on controversial 
social issues or preside over political debates at their 
shareholder meetings.
    Three, increase the economic thresholds for filing 
shareholder proposals. Their current $2,000-requirement for 
long-term investors is not sufficient given the substantial 
costs imposed on companies and other investors.
    Four, provide meaningful oversight of proxy advisors. As 
detailed in my written testimony, proxy advisors have a 
significant influence over proxy voting outcomes. The Society 
supports reforms that would promote greater accuracy, 
transparency, and completeness of proxy research. In 
particular, companies should have a reasonable opportunity to 
review draft proxy reports for accuracy before investors start 
voting.
    Five, we support limits on the use of automated proxy 
voting systems. The SEC should require clients of proxy 
advisory firms to verify they have received final research 
reports before their shares are voted. And finally, the Society 
supports the creation of a public company advisory committee of 
the SEC. Public companies really have no voice at the SEC, 
except for when they are commenting on proposed rules. We think 
providing that voice prior to the proposal of rules would help 
ensure a more balanced rulemaking process.
    Thank you.
    [The prepared statement of Mr. Allen can be found on page 
54 of the appendix.]
    Chairman McHenry. Thank you. Mr. Copland, you are now 
recognized for 5 minutes.

       STATEMENT OF JAMES R. COPLAND, SENIOR FELLOW AND
      DIRECTOR, MANHATTAN INSTITUTE FOR POLICY RESEARCH

    Mr. Copland. Thank you. Chairman McHenry, Ranking Member 
Waters, and members of the committee, I would really like to 
thank you for the invitation to testify today. My name is James 
R. Copland, and since 2003, I have been a scholar with the 
Manhattan Institute, where I am a senior fellow and director of 
legal policy research. Although my comments draw upon such 
research conducted for my employer, my statement before the 
committee today is solely my own.
    I am very pleased that this committee is tackling this 
issue in such an extensive way. I have been studying the 
shareholders proposal process since before 2011, when, under my 
leadership, the Manhattan Institute launched our proxy monitor 
database, which contains current and historical data on 
shareholder proposals introduced at America's largest publicly-
traded companies.
    I first oversaw empirical research into proxy advisory 
firms and wrote about their influence in The Wall Street 
Journal 11 years ago. I published research on the adverse 
economic impact of public pension funds, socially-oriented 
shareholder activism 8 years ago, and, of course, 7 years ago, 
I presented extensive testimony to a subcommittee of this body 
detailing the problems with proxy advisory firms and the 
shareholder proposal process, and calling for reforms. So, 
today's hearing is very welcome and a long time coming.
    In my limited time here today, I want to emphasize four key 
points. One is that, to an extent, most Americans do not 
realize a very small number of actors exert enormous influence 
over almost all of our largest businesses. These actors are 
neither democratically-elected representatives, nor investing 
geniuses. Rather, we are talking about two relatively small, 
privately-owned proxy advisory firms--ISS and Glass Lewis--that 
oversee much of shareholder voting, and three large asset 
management fund families--BlackRock, State Street, and 
Vanguard--that mostly make their money by passively tracking 
stock market indices, but play an extraordinarily large role in 
corporate governance.
    Two, this small oligarchies' influence is very much a 
function of our regulatory structure. Proxy advisory firms 
emerged in the wake of legal guidance given by Federal 
regulatory agencies on institutional and pension voting. The 
shareholder proposal process itself is essentially mandated by 
the Securities and Exchange Commission, even though this body 
has not clearly authorized the agency to do so. As I detail in 
my written testimony, the SEC has effectively preempted State 
corporate law without congressional authorization and it 
regularly compels controversial speech in violation of the 
First Amendment.
    Three, under this Administration, the SEC and other 
regulators have been aggressively going beyond their statutory 
missions to promote environmental and social regulatory causes. 
They are effectively doing an end run around Congress to 
achieve, through executive rulemaking, policy goals that go 
beyond those endorsed by the legislature. The SEC has also 
recently altered its staff guidance in handling shareholder 
proposals, effectively doing an end run around the notice-and-
comment rulemaking process mandated by Congress through the 
Administrative Procedure Act (APA). The SEC's new position is 
that corporate annual meetings must permit the smallest of 
shareholders to force shareholder votes on any social or policy 
concerns, whether or not material to the company's business.
    Four, this change in policy has predictably led to a 
significant increase in socially-oriented shareholder activism. 
In 2022, the first year after the SEC's new guidance, the 
number of shareholder proposals faced by the large companies 
tracked in our proxy monitor database jumped 33 percent over 
the prior 3-year average. To date, in 2023, with approximately 
10 percent of companies yet to file a proxy statement, 
companies have already seen a record number of shareholder 
proposals.
    This increase has been driven principally by a large uptick 
in the filing of proposals relating to environmental, social, 
or policy issues. To date, in 2023, Fortune 250 companies have 
considered 243 such proposals, more than in 2022 and more than 
double the numbers seen in any of the prior 3 years. Indeed, 
for the second consecutive year, more than 60 percent of 
shareholder proposals at large companies have had a social or 
environmental focus, which has never before happened, dating 
back to 2006, the first year covered by the proxy monitor 
database.
    Beyond these central concerns, I have submitted extensive 
written testimony for the record, in addition to incorporating, 
by reference, a large number of my writings on the subject, and 
I am happy to discuss these in more detail and to talk about 
suggested legislation in the question-and-answer portion of the 
hearing. Thanks again for including me in this hearing.
    [The prepared statement of Mr. Copland can be found on page 
65 of the appendix.]
    Chairman McHenry. Thank you. Mr. Cunningham, you are now 
recognized for 5 minutes.

        STATEMENT OF LAWRENCE A. CUNNINGHAM, SPECIAL
                  COUNSEL, MAYER BROWN LLP

    Mr. Cunningham. Chairman McHenry, Ranking Member Waters, 
and committee members, thank you for the opportunity to 
testify. I am Lawrence Cunningham, special counsel at Mayer 
Brown, and emeritus professor at George Washington University, 
although the comments I make today are my own.
    Having spent my 35-year career in the corporate field as a 
lawyer, a professor, a corporate director of public companies, 
and as the author of many popular investment titles, I have 
come to believe that congressional action is needed to 
strengthen the protection of investors because events have 
overtaken existing law. To see how, consider the changing 
landscape since I began my career. Back then, individual 
investors routinely owned stock directly. In corporate America, 
70 percent of public equity was owned by individuals and 
families, but today, most Americans invest through mutual funds 
and pension funds. Such asset managers now hold 70 percent of 
public equity on their behalf.
    Asset managers used to pick stocks by researching 
particular companies, but today most index, meaning buying all 
the stocks in the market without much research. Managers used 
to vote the shares by putting investor returns first, often by 
following a company's board recommendations, but indexers now 
use general formulas or defer to proxy advisors, reducing the 
emphasis on returns. Back then, proxy advisors were policy 
wonks and didn't need any oversight or to have any duties, but 
today, they are for-profit powerhouses, yet still without 
duties or oversight. Special interests have long tried to 
insert themselves into corporate governance for their own ends, 
but these changes have emboldened them to seize unprecedented 
power, harming American investors.
    Three topics need addressing to protect investors. First, 
the Federal shareholder proposal rule, once used to improve 
corporate governance to protect investors, is attracting 
special interests in record numbers and reach to advance their 
goals at the expense of investors. While special interests have 
always tried to do so, State and Federal law historically 
restricted them. But 2 years ago, the SEC staff began requiring 
companies to include special interest proposals of a social 
nature any time the staff deems it significant. That resulted 
in far more boards being required to include those proposals, 
against their fiduciary judgment.
    Shareholders, in turn, have been rejecting these proposals 
by record margins. This year, only 5 percent of proposals 
passed. The average support was a mere 25 percent, but special 
interests win publicity even when their proposals lose, 
subsidized by American investors. Another data point speaks 
volumes. This proxy season, more than half of all proposals 
were made by five parties. All of these figures show that the 
production of shareholder proposals does not have widespread 
support in America.
    Second, those special interests are taking advantage of the 
rise of indexing, an ingenious investment strategy that 
involves buying all the stocks in a market, delivering the 
market return with no risk. This popular strategy is now used 
by funds that manage half of American public equity. The genius 
of index investing is to avoid all the costs of research and to 
avoid having any particular risk. The challenge, though, is 
then for those funds to figure out how to vote those shares. 
One solution which many index funds used to use would be to 
follow the recommendations of the company's fiduciary board.
    More recently, the largest funds began publishing 
guidelines about how they would vote, which are one-size-fits-
all formulas that aren't really fit for many companies. And as 
social proposals proliferate, the guidelines now state views 
aligning with public special interest groups rather than 
focusing on the economic rationales of the particular subject 
for the particular company and its shareholders.
    I am honored to be here today. I would be happy to help the 
committee in any way that I can, and I'm also happy to answer 
your questions.
    [The prepared statement of Mr. Cunningham can be found on 
page 85 of the appendix.]
    Chairman McHenry. Thank you. Now, we will go to you, Mr. 
Zycher, for 5 minutes.

          STATEMENT OF BENJAMIN ZYCHER, SENIOR FELLOW,
                 AMERICAN ENTERPRISE INSTITUTE

    Mr. Zycher. Thank you, Mr. Chairman. Both earlier and 
recent regulatory actions by the Securities and Exchange 
Commission have created a duopoly in the market for proxy 
advisory services and powerful incentives for firms and funds 
to retain proxy advisors and to adopt their recommendations, 
often on an automatic basis. The advisors themselves have weak 
incentives to consider the fiduciary interests of shareholders 
and fund participants, thus freeing them to indulge their own 
political preferences at little or no cost to themselves.
    Unsurprisingly, environmental, social, and governance 
political objectives have begun to heavily influence proxy 
advice. The resulting economic effects borne by shareholders 
and fund participants have been substantially negative and will 
increase in the absence of reforms driven by Congress. A 
conservative estimate is a decline in investment returns of 2 
business points per year. Other factors held constant and much 
greater adverse effects in the case of divestment pressures 
aimed at the fossil energy sector.
    This can surprise no one. ESG management and investment 
imperatives impose artificial constraints on management options 
and the components of investment portfolios, and, thus, cannot 
be expected to yield positive investment impacts. Over time, 
for the economy and the aggregate, the impacts of this 
reduction in economic returns are substantial. A very simple 
analysis based upon fully-plausible assumptions implies that an 
ESG politicization of business management capital allocation 
would yield a decline in investment returns of four-tenths of a 
percent over a 20-year period, and a capital stock smaller by 
over 11 percent. Annual GDP would decline by $850 billion, and 
the annual labor compensation by more than 3 percent. Even if 
those effects are overstated by an order of magnitude, they 
still would be significant.
    Current proposals by financial regulators to force the 
private sector to implement climate policies in the form of 
measurement and reductions in greenhouse gas emissions would 
create severely-adverse impacts, while engendering climate 
effects literally equal to zero. The most-prominent of these is 
the SEC-proposed rule for the enhancement and standardization 
of climate-related disclosures for investors, mandating that 
public companies estimate their greenhouse gas emissions 
defined broadly, and analyze the risks that their emissions 
might pose to their current and future investors. Such 
disclosures would not be material, in particular because 
greenhouse gas emissions from a given firm, however broadly 
defined, cannot possibly have measurable climate effects and, 
thus, would have no impacts on prospective returns to 
investments in that firm. Moreover, no firm or industry is 
capable of analyzing the effects of greenhouse gas emissions on 
climate phenomena generally, and/or in particular, on a 
geographic or sectorial basis. Governments have never 
demonstrated an ability to do so.
    The uncertainties reported by the Intergovernmental Panel 
on Climate Change (IPCC) are staggering. And the climate system 
is so complex and so poorly understood that the IPCC climate 
models, on average, have overstated the actual satellite 
temperature record by a factor of about 2.5 percent.
    The central impacts of the SEC proposal will be a vast 
increase in various kinds of litigation efforts by firms 
subject to these SEC rules, and to implement them in ways 
designed to avoid that litigation which threatens the growth of 
the heavily-parasitic industry of consultants.
    A similar set of problems is attendant upon the high-level 
framework draft principles presented by the Board of Governors 
of the Federal Reserve System. I won't belabor that point right 
here. One reality, though, has been curiously absent: the 
public discussion. Climate policies, as currently promoted, 
would have political effects virtually indistinguishable from 
zero. A good example is the Biden Administration's net zero 
proposal, which would, using the EPA climate model, reduce 
global temperatures in the year 2100 by 17,100 of 1 degree.
    I urge Congress not to focus on the large asset managers: 
BlackRock, State Street, and Vanguard. Their incentive is 
roughly efficient, however silly their public pronouncements. I 
urge Congress instead to reform the SEC regulatory framework. I 
urge Congress to enact legislation constraining the efforts of 
regulatory agencies to pursue climate policies not authorized 
in the law, uninformed by actual evidence, and justified on the 
basis of fundamentally dishonest cost-benefit analysis. Such 
regulatory efforts have and will continue to engender vast 
costs and no benefits. Congress must make it clear that only 
under new legislation can regulatory policies be expanded 
beyond the limits now authorized by statute. Thank you very 
much, Mr. Chairman.
    [The prepared statement of Mr. Zycher can be found on page 
102 of the appendix.]
    Chairman McHenry. I now recognize Attorney General Ellison. 
Thank you for being here.

      STATEMENT OF THE HONORABLE KEITH ELLISON, ATTORNEY
                 GENERAL, STATE OF MINNESOTA

    Mr. Ellison. Certainly. Thank you, Chairman McHenry, 
Ranking Member Waters, and members of the committee. My name is 
Keith Ellison and I serve as Minnesota's Attorney General. I 
was a member of this committee for 12 years, as you pointed 
out, and it is certainly an honor to be back with you, and it 
is an honor to see all the new members. There are a number of 
new faces.
    As Attorney General, I serve on the governing board of the 
Minnesota State Board of Investment, which we call the SBI. The 
SBI is a fiduciary for $125 billion in assets, serving more 
than 820,000 active and retired Minnesota public employees. 
Active public employees entrust us with a portion of their 
salaries in return for a secure investment. Public employers 
across the State entrust us with a portion of their balance 
sheets in return for a critical future benefit for their 
employees. I am proud that the SBI pays out more than $5 
billion a year in benefits to our members. In many cases, these 
benefits are the recipients' own most important financial 
asset.
    One of our values is addressing environmental, social, and 
governance-related issues, and we know that they can and do 
lead to positive outcomes and add long-term value to our 
investments. Year-over-year, the Minnesota SBI is one of the 
highest-performing public pension funds in America. ESG best 
practices and high market returns go hand in hand. Minnesota's 
public employees want us to invest wisely so their retirement 
is secure. As their fiduciaries, we have a duty to carefully 
consider all relevant investment risks and opportunities on 
their behalf. Their future is our portfolio. Indeed, it is the 
duty of fiduciaries in every sector to consider risks and 
opportunities that could impact their investments and their 
business.
    The private sector is now overwhelmingly considering ESG 
risk factors in investing. This why 96 percent of the largest 
250 global companies now issue a sustainability report. They 
don't do it out of the goodness of their hearts. They do it 
because it is good for businesses, shareholders, pensioners, 
and profits. ESG is nothing more than looking clear-eyed at 
risks and opportunities in the real world and making sound 
investment decisions on that basis. As Illinois State Treasurer 
Michael Frerichs plainly stated in another congressional 
hearing, ``ESG is Data,'' and data shows a positive correlation 
between ESG principles and returns on equity.
    Despite this data, in States across the country, there is a 
concerted attack on the freedom to invest. This attack is 
already leading to more costs and lower returns for businesses, 
pensioners, and taxpayers. For example, according to an 
academic paper published by Wharton, anti-free market 
legislation may have cost taxpayers in Texas up to $532 million 
in higher interest rates and costs in just 1 year. According to 
Reuters, an anti-sustainable investing bill in Indiana can cut 
State pension returns by $6.7 billion in 10 years. According to 
a publication, Institutional Investor, Kansas could lose up to 
$3.6 billion in the same timeframe based on a similar bill.
    But perhaps, these bills are not about data. Perhaps, they 
have nothing to do with ESG at all. Perhaps, they are about 
running roughshod over the freedom to invest in order to 
protect one industry, in particular, the fossil fuel industry, 
the industry that bears so much responsibility for the costs of 
climate change, and has waged a decades-long campaign of 
deception to deflect it.
    Prohibiting members, investors, and asset managers from 
considering ESG factors is interfering with the free market. 
Censoring relevant financial information is exactly what 
Congress should not be doing. Legislation that attempts to 
hijack the freedom to invest is a threat to the financial 
security of retirees and families in every State, including 
mine. Most Americans don't know what, ``ESG,'' means, but it is 
actually a bread-and-butter issue. To anyone who wants to 
ignore ESG risk, I say, bet your own money, but don't gamble 
with Americans' life savings.
    I urge you to join me in standing up for Americans' freedom 
to invest and standing up against anti-ESG bills that interfere 
with our freedom. Thank you very much.
    [The prepared statement of Attorney General Ellison can be 
found on page 98 of the appendix.]
    Chairman McHenry. Thank you for your testimony. And I would 
like to thank the entire panel for being here. I will now 
recognize myself for 5 minutes for questions.
    Mr. Copland, last fall, the Supreme Court issued a decision 
in the case known as West Virginia v. EPA. The case is 
significant for a number of reasons, but particularly to the 
matters of the day. Would you explain the Supreme Court's 
position regarding Federal agencies' regulatory authority over 
significant policy matters? Then, I would like to see how it 
applies to the matter at hand.
    Mr. Copland. Yes, thank you, Mr. Chairman. The West 
Virginia v. EPA decision last year formalized at the Supreme 
Court what we have seen in a number of other cases, as well as 
in the appellate courts, which is what is commonly called the 
major questions doctrine, or at least that is what it is called 
now. And the basic premise there is that when it comes to big 
policy matters, this body, the Congress, makes the decision on 
where the legislation is supposed to go, not a regulatory 
agency, unless Congress has spoken clearly and delegated 
certain authorities to that agency.
    Now, there is some disagreement among the Supreme Court 
Justices about what it means, and Justice Amy Coney Barrett 
articulated a position in Biden v. Nebraska, the student loan 
case that just came down at the end of last month, saying that, 
really, this is just more common-sense analysis of reading a 
statute. So, if the statute is talking about one thing, and the 
agency goes off in some other direction, we are not going to 
read it that way, unless the language is really clear that 
Congress is making that happen.
    Chairman McHenry. Can you speak to that example of those 
two court cases and apply it to this specific matter today 
about the Securities and Exchange Commission's ability to 
require climate-related disclosures?
    Mr. Copland. As I said in The Wall Street Journal last 
summer, if the Environmental Protection Agency (EPA) is 
stepping out of bounds in doing various sorts of climate 
regulations, the Supreme Court determined a year ago, clearly 
the Securities and Exchange Commission, which is about 
protecting investors so that they know what is going on in the 
companies they invest in, is going to be limited in what it----
    Chairman McHenry. Has the SEC's position on climate 
disclosures changed? Give an example of 2016 to today, and is 
there a difference?
    Mr. Copland. Yes. In 2010, the SEC came down with rules on 
climate change disclosure, but they were narrowly focused to 
material information, which really ought to be included anyway 
in disclosures. And then in 2016, the SEC came out with a 
policy statement saying, the broad issue here is off limits. 
And just last year, they sort of basically reversed course on 
that, and they came out with disclosure requirements extending 
to vendors, non-material information, board decision-making, 
and all sorts of things. I filed a common letter extensively to 
the Commission----
    Chairman McHenry. Let's speak to that. Mr. Cunningham, can 
you speak to the question of materiality and its import with 
securities disclosures, historically?
    Mr. Cunningham. Yes. A fundamental principle of the 
securities law of jurisprudence is that the purpose of 
disclosure is to provide information that a reasonable investor 
would consider important in making an investment or voting 
decision, and that articulation is of longstanding Supreme 
Court vintage. Now, there are some small details within the 
securities framework that might be required that wouldn't 
satisfy that definition, but much of the bulk of the pending 
climate disclosure rule dispenses with that constraint, and I 
think that is the concern.
    Chairman McHenry. How does this question of materiality 
benefit an average investor?
    Mr. Cunningham. Because investors will only be given 
information that is useful to them in making their investment 
decisions. The real risk is of the floodgates opening and are 
overwhelming investors with abundant information they can't 
make sense of, and they can't use, so the materiality threshold 
is really a good filter that is useful for them.
    Chairman McHenry. Okay. So, is there a reason to deviate 
from that principle in light of climate or environmental 
concerns?
    Mr. Cunningham. No, and it is hard to think of why an 
investor would care about trivial information or an avalanche 
of information that would drown them in useless detail, and I 
think that is the big concern.
    Chairman McHenry. Okay. Thank you for your testimony. I 
want to thank the panel, and I will now recognize the ranking 
member for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman. Attorney General 
Ellison, I want to thank you for testifying, but also I would 
like to apologize. Perhaps, you thought you were returning to a 
committee that you once served on, the Committee on Financial 
Services, but that committee doesn't exist anymore. We are now 
the committee of culture wars.
    In order to shine light on what is fact and what isn't, I 
want to ask you a number of questions about the duties of 
fiduciaries. As you know, most Americans invest their funds in 
pension plans like the California State Teachers Retirement 
System (CalSTRS) or the Minnesota State Retirement System 
(MSRS), or in mutual funds. These pension plans, mutual funds, 
and others are required by law to act as fiduciaries and work 
in the best interests of investors.
    So, Attorney General Ellison, I would like to ask you a 
series of yes-or-no questions about how a fiduciary evaluates 
the investments they make on behalf of their beneficiaries. Is 
it true that a fiduciary's main responsibility is to secure the 
strongest possible risk-adjusted returns where the investors 
are beneficiaries?
    Mr. Ellison. Yes, ma'am.
    Ms. Waters. If a company has significant assets exposed to 
physical risk, for example, manufacturing facilities that are 
in an area that experiences frequent hurricanes and sea level 
rise, would a fiduciary be within their duties to consider that 
risk?
    Mr. Ellison. I think it would be their duty.
    Ms. Waters. If a company's core product poses significant 
risk to human health, and as a result, foreseeable liability 
risk to the manufacturer, would a fiduciary be within their 
duties to consider that risk?
    Mr. Ellison. Absolutely.
    Ms. Waters. Let's say a fiduciary has reason to believe 
that a company's internal accountant controls and independent 
board oversight are severely deficient. Do you think the 
fiduciary should be permitted to offer a shareholder proposal 
on behalf of their beneficiaries at a company's annual meeting, 
urging that company to improve its controls and oversight?
    Mr. Ellison. Yes, it would be expected.
    Ms. Waters. Now, there is a bill that has been noticed for 
this hearing that would prohibit making proposals like this 
because they are, ``governance related.'' Do you think it 
serves the interests of investors to prohibit such proposals?
    Mr. Ellison. No, ma'am, I don't think it does.
    Ms. Water. Attorney General Ellison, Republicans have 
labeled any program they don't like as socialist, from Medicare 
to Social Security. But it seems to me that by trying to block 
the owners of capital investors and their chosen fiduciaries 
from exercising their rights, and from trying to make money, 
Republicans may need a lesson on how capitalism actually works. 
What do you think, Mr. Ellison?
    Mr. Ellison. I think that risk-adjusted factors and 
considerations are important to advance the best interests of 
the beneficiaries of the pension fund that I sit on, and I want 
to know all of the information. And certainly, there are 
numerous examples of how ESG factors would benefit those 
beneficiaries, and, in fact, they demand it. They ask us to 
factor in those risk factors.
    Ms. Waters. Thank you, Mr. Ellison. I want to turn to 
private funds. Today, private equity funds hold approximately 
$7 trillion, and venture capital funds hold $1 trillion. 
However, they are not required to disclose their investments in 
women- and minority-owned businesses, or in companies that 
evaluate environmental, social, and governance factors. These 
private funds nowadays play an indispensable role in our 
economy.
    Private equity and other private bonds are involved in 
mergers and acquisitions, lending, and restructuring of huge 
companies. Venture capital funds provide funding to startups 
and early-stage companies. This lack of private fund 
transparency makes it difficult for investors, like pension 
plans, to value the fund, including by understanding the fund's 
investments in women-owned and diverse-owned businesses, and 
businesses that promote diversity, equity, and sustainability.
    What are your views on the lack of transparency as it 
relates to private funds? How could we achieve the types of 
transparency, accountability, and really sustainable future we 
want to achieve without increasing our understanding of the 
investment policies and practices of private funds?
    Mr. Ellison. I think groupthink is dangerous for corporate 
governance. I think groupthink leads to not considering factors 
that impact the company, so we need diversity. We need 
different perspectives in order to have a company that can 
factor in everything that impinges upon the bottom line for 
whether investors are beneficiaries of a pension fund, so we 
need to factor it all in.
    Chairman McHenry. The gentlelady's time has expired.
    Mr. Ellison. Thank you.
    Ms. Waters. I yield back. Thank you.
    Chairman McHenry. The gentlelady yields back. We will now 
go to the gentleman from Arkansas, the Vice Chair of the 
committee, Mr. Hill, for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman. I commend you, and our 
Capital Markets Subcommittee for the good work and this 
excellent panel.
    Professor Cunningham, it's great to see you. I have read 
all of your books, so I will recommend them, and there is no 
need to send me a fee for that. I just think if you are 
interested in investment practices, governance, or corporate 
finance, you need to read Larry Cunningham's books. And it's 
terrific to see my good friend, Attorney General Ellison, back 
at our committee.
    Mr. Ellison. Likewise.
    Mr. Hill. These days, it seems like our SEC is more the, 
``Securities and Environment Commission,'' instead of the 
Securities and Exchange Commission. And we need to think long 
and hard about that because the Commission, under its current 
leadership wants to become America's green regulator, because 
there is no consensus legislatively about how to fully address 
climate. And mandating ESG disclosures for public and private 
companies, in my view, is drifting far from the statutory 
mission of the Commission.
    Let me be clear: If a company wants to make climate or 
other ESG disclosures, they are perfectly within their rights 
to do that. In fact, as a former private and public company 
director and C-suite executive, they have a statutory and 
fiduciary responsibility to do that, right now under current 
law, to make sure that the investment community understands 
their strategies, and that they have outstanding human 
resources policies, supply chains, resiliency, and capital 
allocation. So if ESG factors are material to that investment 
decision, our law covers that today. No regulatory mandate is 
necessary.
    And to my good friend from Minnesota, I think your quote 
was, ``I don't believe that anyone is proposing to ignore ESG 
to their peril.'' In fact, we are for crafting practical, 
effective, cost-effective, particularly, responses driven by 
those market participants.
    Mr. Ellison, if a publicly-traded company spends an 
insignificant amount of money on electricity, let's say, it is 
kind of hard to think about that. I am just picking a 
hypothetical example. I know lawyers don't like hypothetical 
examples. And as they consider disclosing it, if it is not 
material to them, is that really something they should spend a 
lot of time on? Is that a practical aspect of materiality?
    Mr. Ellison. If something is not material, then it need not 
be considered, but so often, ESG considerations are material.
    Mr. Hill. But don't you think that the fiduciary statutory 
obligation of that C-suite and that board is there now to make 
that determination, as opposed to it being literally a mandate 
across-the-board for every public and private company that one-
size-fits-all? Really?
    Mr. Ellison. Let's go back to 2008, when we had the 
mortgage crisis. I think part of why we got into that crisis is 
that we did not have enough people thinking about the 360-
degree risk.
    Mr. Hill. Yes. Fair point. I don't want to take up my time 
doing that, but I do want to thank you for our work together on 
credit inclusion.
    Mr. Ellison. Absolutely.
    Mr. Hill. And we did that bill together during Mr. 
Hensarling's chairmanship, to add additional data for rental 
payments and utility payments to allow more people to have 
access to credit. Do you still like that idea?
    Mr. Ellison. Yes.
    Mr. Hill. Good. Mr. Allen, your testimony was excellent, 
with a fantastic list of recommendations. Can you talk about 
the potential consequences if the SEC were to require companies 
to disclose non-material climate information?
    Mr. Allen. Thank you for the question. I think the biggest 
consequence would be, well, there are several consequences. 
First, there would be significant costs imposed on public 
companies. In our three common letters to the SEC, we detail 
our members' cost concerns. Another concern, and I think you 
alluded to this earlier, is the impact on private companies, 
small businesses, minority-owned businesses within companies 
supply chains. Under the SEC----
    Mr. Hill. Yes, I hear from businesses all the time that 
they can't comply with the conflict mineral rule now, 
technically, all the way down the supply chain. How could they 
do it? Could they really be able to do this? Scope 3, is that 
realistic?
    Mr. Allen. No. I think a lot of these smaller ventures, 
these local firms, farmers, and others would be unable to bear 
this burden.
    Mr. Hill. Let me switch gears. Mr. Copland, in this 
committee and in the Executive Branch, we typically push back 
about extraterritorial things that we think hurt American 
performance, American systems, where some Europeans don't 
understand that we are organized a little differently here. 
What are your concerns about the potential impact and cost to 
U.S. businesses from this European set of mandates that they 
plan on imposing on U.S. businesses?
    Mr. Copland. I am very concerned with it, and I think this 
committee should be, and this Congress should be concerned. 
Basically, in a nutshell, what they are talking about doing in 
Europe is creating a form of climate disclosure regulation that 
applies not only to subsidiaries of American companies 
operating in Europe, but to the parent companies themselves.
    Mr. Hill. Thank you. My time has expired. I yield back, but 
if you have more, would you please respond in writing on that 
question? Thank you. I yield back.
    Chairman McHenry. We will now go to the ranking member of 
our Capital Markets Subcommittee, Mr. Sherman of California, 
for 5 minutes.
    Mr. Sherman. I agree with the gentleman from Arkansas that 
these additional disclosures that so many investors want are 
difficult to design. It took over 200 years for the accounting 
profession to define and provide systems to tabulate, audit, 
and report the information on the balance sheet, the income 
statement. And I think that sometimes in our fervor to give 
people information that they want about the environment, we 
overlook how difficult it will be for that information to be 
comparable, tabulable, and auditable.
    What shocks me is that 20 years ago, it was more folks on 
the conservative side who wanted shareholders to be able to 
make decisions based on something other than earnings per 
share, and shut up and do whatever the corporate board wants. 
In this room 20 years ago, we passed legislation to allow 
shareholders and pension plans to divest from companies that 
were helping Iran's economy at a time when it was building 
nuclear weapons. And today, many conservatives would divest 
their stock holdings in a company that was about to transfer 
technical, artificial intelligence technology to China.
    We are told by some that materiality is 5 percent of 
earnings, but I think Mr. Cunningham was correct in telling us 
that materiality is what a reasonable investor thinks is 
important, and some people think the environment is important. 
Some people think whether the Chinese Communist Party gets the 
most technical AI information is important.
    Mr. Cunningham tells us that we should let the States 
decide. That is a race to the bottom. It is kind of a phony 
democracy, kind of a Putin's democracy: one person, one vote, 
one time. You elect the board, and then they are in total 
control. They go to Delaware, and they will agree to pay some 
fees as long as you give them rules that make it clear that the 
shareholders can't tell the board what to do, and then if 
Delaware won't do that, you go to Wyoming. If Wyoming won't do 
that, you go to North Dakota. If we are going to have 
shareholder democracy, it needs to be protected by the SEC.
    Mr. Ellison, welcome back.
    Mr. Ellison. It's good to be back.
    Mr. Sherman. You deal with conservatorships, guardianships 
in the State of Minnesota. If somebody is incompetent to deal 
with their money, a conservator is appointed. Now, look, if 
somebody wanted to spend their money buying bad art or Yankee 
season tickets, maybe a conservator should be appointed because 
they are wasting their money on something totally unreasonable. 
Would an investor be deprived of their right to decide how to 
invest simply because they cared about, say, the environment?
    Mr. Ellison. I certainly don't think so. I think it gives 
them freedom to invest.
    Mr. Sherman. And would you take away their right to invest 
if they didn't want to invest in a company that was 
transferring highly-sensitive technology to China?
    Mr. Ellison. I don't think we take away their right to 
invest.
    Mr. Sherman. But how would you have a right to invest on 
this basis or that basis if you didn't get the information that 
you wanted? And I don't want to point out that there might be 
some peculiar investor who cares how many buildings are painted 
purple, and we don't have time to tell them. But the reason for 
this hearing is not because investors won't vote for these 
resolutions; it is because they will, and 5 percent of the time 
they do, and 25 percent of them vote for them. That is the 
reason for this hearing, to blind investors to the information 
they want. Is there any meaningful way for an intelligent 
investor to decide to invest on the basis of impact on the 
environment if we don't allow the investor to have that 
information, Mr. Ellison?
    Mr. Ellison. I don't know how you can make an intelligent 
decision about an investment if you don't have the information.
    Mr. Sherman. In fact, perhaps the only thing that would be 
crazy is trying to invest for the environment in a society that 
deprives you of all information about how your investments are 
affecting the environment. Let's see. And finally--my time has 
expired.
    Mr. Huizenga. [presiding]. The gentleman yields back. With 
that, the gentleman from Texas, Mr. Sessions, is recognized for 
5 minutes.
    Mr. Sessions. Mr. Chairman, thank you very much. Mr. 
Ellison, welcome back. It's good to see you.
    Mr. Ellison. Likewise. Thank you.
    Mr. Sessions. The marketplace has been reacting strongly to 
its viewpoints about people making decisions in the marketplace 
and how consumers react to that. And I find it very interesting 
and important that Mr. Ellison wanted his State to make the 
decisions that they made. I respect that.
    However, Mr. Copland, it has become apparent to me and 
other Members, I think, of this committee that you will hear 
from today, that we believe the SEC, as a government 
institution, is abusing the discretion delegated to it. It is 
not the customer; it is the oversight. And we believe that it 
is using this discretion that is delegated by Congress to 
undermine and even destroy disfavored industries and companies 
that don't align with what is a political agenda of the current 
Administration, particularly in this case of exercise of 
investigatory discretion.
    Could you please talk with me and this committee on how a 
case could be made for abuse of its congressionally-designated 
discretion at the SEC? Could it be made based on existing 
evidence around this implementation of social policy and 
financial regulations and what we in Congress should do about 
that?
    Mr. Copland. Absolutely. I think, as I alluded to in my 
testimony, that they have been doing end runs in a variety of 
ways. The colloquy I had with the chairman briefly on sort of 
major questions is part of the issue here. The SEC was created 
in the 1930s, and our securities regulatory regime was created 
in the 1933 and 1934 Acts. And the principle of that is to put 
disclosure out there so that investors can know what is 
happening with companies so that we can have a robust, 
publicly-traded stock market, and that generally has worked 
well. It is not to engage in substantive policymaking.
    So, this sort of end run around Congress going into 
environmental issues--and, again, I want to emphasize, for the 
interpretive guidance that the SEC gave in 2010, I am on record 
as saying it is material information, and that it is reasonable 
to have a disclosure for it. I was pleased to see the Attorney 
General say that this information ought to be material, because 
that is not what they did last year in the proposed rule that 
is still pending before the SEC on climate disclosure.
    The other thing we have seen is that it is not just the 
rulemaking process. They are actually end running the 
rulemaking process, and this is what they did in November of 
2021 with Staff Legal Bulletin No. 14L. In that move, they 
basically said, well, anything, even if it is not material, if 
it is a matter of public concern or social concern, we are 
going to allow it on the ballot. Now, as I document in my 
written testimony, this is an exact inversion of the old rule, 
which allowed such proposals to be excluded from ballots, and 
that was the rule until the 1970s when the SEC completely 
flipped its position on its head.
    This is very problematic. What we are doing is the 
regulator is exceeding what Congress has said it can do, and it 
is trying to achieve a policy goal, and it is not limited to 
just the SEC, right? We have seen the same thing from the 
Federal Reserve, the Office of the Comptroller of the Currency, 
et cetera, et cetera, et cetera. This is something that we have 
seen across financial regulators in this Administration.
    Mr. Session. I agree with you. I also agree that if Mr. 
Ellison or his State as a consumer, customer, investor wanted 
to make that decision, then they would make that decision about 
seeking someone who would give them more information. I am 
concerned about the overreach of government regulators, as you 
just expressed, about how they use the discretionary powers 
that they have to drive down political instruction and 
decisions. And I find it very interesting that we were accused 
in the very beginning of this hearing of driving a political 
agenda. We know who has the political agenda, because free 
markets like to make their own decisions, and people who are 
investors like to invest in the things that will gain them what 
they are after. And when it is driven by government, I think we 
make a mistake.
    I want to thank each of you for being here today. Mr. 
Chairman, I yield back.
    Mr. Huizenga. The gentleman's time has expired. The 
gentleman from Georgia, Mr. Scott, is now recognized for 5 
minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. Let me just 
say I have some concerns about the proposals as an emissions 
disclosure, or what we call Scope 3, what effect it will have 
and what it imposes on our small, family-owned farms and 
ranches. I don't know if you all know, but 98 percent of all of 
the farms in the United States are independent, family-owned 
operations that do not have the financial resources to track 
and report the emissions data necessary to meet the Scope 3 
disclosure requirement. Do you realize that? Mr. Zycher--I hope 
I pronounced your name correctly----
    Mr. Zycher. Yes. That is fine, Congressman.
    Mr. Scott. Yes. Thank you. My understanding is that for 
large companies, the reporting requirements rule does not 
require them to collect precise emissions data for farms and 
ranches or any business from which they source. So, if enacted, 
could a publicly-traded company still choose to seek data from 
small farms or agriculture suppliers if it wanted to? And also, 
under what circumstances could we see this happening?
    Mr. Zycher. A firm can seek to acquire information from 
anyone it chooses. Whether the recipient of that request is 
legally required to provide it is a different question. I am 
not sure about the answer to that question with respect to the 
small agricultural sector. Jim Copland may know the answer to 
that, but I do not.
    Mr. Scott. Then, what about large publicly-traded banks or 
other financial institutions which provide loans to small 
farmers and ranchers? Could Scope 3 requirements have an 
unintended consequence on the amount of loans or investment 
activity that is made by banks?
    Mr. Zycher. The Fed's draft principles, if I recall 
correctly, do not break out Scope 1, 2, and 3 emissions 
information-gathering requirements. They require large 
financial institutions to estimate their climate risks, which 
are not very well-defined. The problem is that the estimation 
of those risks depends heavily on the choice of climate model, 
the choice among a myriad of assumptions, and all the rest. And 
the combinations and permutations of models, and assumptions, 
and the rest is very, very unlikely to provide useful 
information for financial regulators, but would be very 
expensive for the financial institutions themselves, and would 
create new litigation risks that are not to be ignored.
    Mr. Scott. Let me just say that I would hope that Mr. 
Gensler would not implement the Scope 3 situation before we can 
carefully look at the impact it will have in our agriculture 
community. A recent New York Times article did some research, 
and do you know, we are losing 1,700 small farmers and ranchers 
every year? We need to carefully look at this impact that this 
could have on our agriculture system, especially our small 
farmers and ranchers. And I trust that Chairman Gensler does 
not intend for the SEC to capture the emissions data of every 
farmer or rancher in the supply chain, so my hope is that he 
will continue to review feedback on the Scope 3 emissions and 
make the appropriate changes before any rule is finalized. 
Thank you, Mr. Chairman.
    Mr. Huizenga. The gentleman's time has expired. The 
gentleman from Missouri, Mr. Luetkemeyer, who is also the Chair 
of our National Security Subcommittee, is now recognized for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Welcome all of 
you. Mr. Ellison, welcome back.
    Mr. Zycher, in your testimony you emphasized the 
significance of climate policy and its impact on capital 
allocation. To me, this seemed like a disguised version of 
Operation Choke Point, where regulators are picking and 
choosing what industries have access to banking services, 
including access to financing. Can you explain how regulatory 
attempts to impose policies on the private sector can affect 
investment decisions and economic performance?
    Mr. Zycher. Yes. Such regulatory efforts, particularly 
aimed at the fossil energy industry and others as well, would 
have the effect of distorting capital allocation by distorting 
investment decisions, lending decisions, and all the rest.
    And as I discussed briefly in my oral statement and more 
extensively in my peer-reviewed statement, the aggregate effect 
would be a less-valuable capital stock, producing a less-
valuable basket of goods and services, a smaller economy, less 
labor productivity, less employment, and lower wages. There is 
simply nothing to be gained, regardless of what you believe 
about the existence or severity of a reported climate crisis. 
These initiatives cannot possibly have any effect on climate 
phenomena, let's say, by the end of the century, and so they 
really do represent all cost and no benefit.
    Mr. Luetkemeyer. Thank you. One of the concerns I have is 
the fiduciary responsibility of these investment groups, 
whether it is BlackRock, State Street, Vanguard, or any other 
entities, big banks, whatever. One of the comments I see here 
in some of the things I have been reading is that corporate 
boardrooms have been turned into partisan platforms where 
political agendas overshadow sound financial management. I 
think in one of the articles here that we have pulled from 
Forbes from about a year ago, it talked about a 14-percent 
decrease in the valuation of these companies.
    Mr. Zycher, in your testimony you talk about ESG funds 
lagging behind other funds by 2 basis points per year. My 
concern is, there is a fiduciary responsibility that these 
companies have for administering these funds. And Mr. 
Cunningham, Mr. Copland, Mr. Allen, if one of you wants to 
answer the question, it seems to me like they have opened 
themselves up to a really big problem, unless they are totally 
disclosing the fact that ESG investment does not make more 
money, and does not give you a better return. But if there is 
an agenda here that is being forced on them from the outside, 
it needs to be disclosed and investors need to know to expect 
less returns. Is that a fair comment, Mr. Cunningham?
    Mr. Cunningham. I do think that special interest groups 
have asserted themselves and have pressured a lot of funds to 
elevate the priority of ESG. There is evidence indicating that 
funds have believed that they get some private advantage from 
presenting themselves that way.
    Mr. Luetkemeyer. Even Mr. Fink, with BlackRock, made the 
comment the other day that he was ashamed about his investment 
policy with regards to ESG. I think Vanguard has pulled out of 
the Net-Zero over in Europe, so they are beginning to 
understand that there was concern. My point is they have a 
fiduciary responsibility to the people for whom they are 
investing this money. Are they showing this, are they 
disclosing this, are you aware of this, such that they can keep 
themselves from being sued?
    Mr. Cunningham. Yes. It is commonly said that following ESG 
practices is good for the long-term economic interests of a 
company or of a fund, but the empirical evidence doesn't 
support that assertion. I am sure people believe it is true, 
but the data don't bear it out. There are some evidence that 
there is a correlation between certain practices and certain 
outcomes, like certain board compositions and corporate 
performance, but there's scant evidence of any causation.
    And incidentally, a lot of proponents of the shareholder 
proposals don't even provide that rationalization. Under the 
SEC's current approach, they are allowed to require companies 
to put in proposals on any socially-significant topic. So, I 
think you have pinpointed a very serious problem for the funds. 
And I think they recognize the problem and they are struggling 
to resolve it.
    Mr. Luetkemeyer. I think Mr. Fink's comment makes that 
point. And I just have one other comment here. Mr. Copland, I 
think you made the comment with regards to laws and rules and 
guidance, and being very concerned that the SEC uses guidance, 
kind of like what the Consumer Financial Protection Bureau 
(CFPB) does, to try and scare, bully, and intimidate people 
into doing things when the guidance is not held as the force of 
law.
    Mr. Huizenga. The gentleman's time has expired.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I yield back.
    Mr. Huizenga. With that, the gentleman from Massachusetts, 
Mr. Lynch, is recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman, and thank you, Ranking 
Member Waters, for holding this hearing. Attorney General 
Ellison, it is wonderful to see you, my friend.
    Mr. Ellison. Likewise.
    Mr. Lynch. It has been a while. As you know, Keith, prior 
to coming to Congress, I was an ironworker for about 20 years. 
I actually worked at the Framingham General Motors facility in 
Framingham, Massachusetts. I also worked at the General 
Dynamics shipyard down at Quincy, and around the same time, in 
the 1980s, General Motors, which was focused on shareholder 
value singularly, decided to close the General Motors plant in 
Framingham, and close one in Michigan as well, and open up two 
plants in Mexico because they were focused on shareholder 
value. I know that in both of those communities where the 
plants closed down in the United States, it was devastating. It 
was devastating. There were, I think, 2,300 workers--it was 3 
shifts in Framingham. It devastated that area for a long time, 
and only recently have they recovered, after all this time, and 
the same thing in Michigan.
    General Motors did that to maximize shareholder value by 
exploiting--they went from a union workforce in the United 
States to a non-union workforce in Mexico in the maquiladoras. 
They also had, at that time, almost no environmental laws in 
Mexico that would prevent them from basically exploiting the 
land there. In that case, the ESG considerations on the 
environmental impact on Mexico, and the social impact of the 
communities here in the United States were completely ignored 
while General Motors relocated those plants and those jobs to 
Mexico. If ESG had been in play at that time, if the impact on 
the local communities had been considered in that decision, 
could all this offshoring, companies moving their jobs to China 
to maximize shareholder value--in your role as the chief law 
enforcement officer in the State of Minnesota, can you see how 
ESG could benefit and inform some of those decisions?
    Mr. Ellison. Thank you, Congressman. It is great to see 
you, too, and to see everyone. I think it is important to point 
out that ESG, as we apply it in the Minnesota State Board of 
Investment (SBI), is not a mandate. It is not like, you must 
only do ESG and you can't do anything else. It is what we ask 
our portfolio manager to consider, and I think it would only be 
of benefit to consider the impact on workers and communities. 
Moving a plant to a foreign country will impact supply chains. 
If something happens there, you have less control over it. You 
may have less quality assurance, not for certain, but it is 
certainly something to consider.
    You may have child labor. Maybe it is cheaper and it can 
drive up your bottom line to use a 13-year-old to clean a kill 
floor in a meatpacking plant, but maybe that is so outside of 
our value system that it is something that we won't do even if 
it will make somebody a few more bucks, right? So, I think that 
these are things to be considered. They should be factored in. 
And the way we apply our ESG policy is that we have a robust, 
diverse conversation and we want these values considered so at 
least somebody can raise the issues that you raised. At least 
somebody can say, hey, what about this? That is what we do with 
our ESG policy.
    Mr. Lynch. That is great. I know that President Biden has 
two reasons that he supported and signed the CHIPS Act. Number 
one, all this chip manufacturing had migrated from our country 
mostly to Taiwan, but other countries as well, so there was a 
national security issue. But he also relocated those plants in 
the Midwest where there was high unemployment, which continues 
today. So, I can see where the President's adherence to ESG 
principles has benefited the workers in the Midwest. I yield 
back, Mr. Chairman. Thank you for your indulgence.
    Mr. Huizenga. The gentleman's time has expired. The 
gentleman yields back, and I now recognize myself for 5 
minutes. I want to say thank you to the witnesses for being 
here. Mr. Ellison, thanks for being back again. I have a lot to 
cover, so I am going to jump right in.
    Mr. Copland, the SEC's legal mandate includes directives to 
protect investors, facilitate capital formation, and promote 
efficient markets. How does the dominance of social and policy 
issues in corporate annual meetings conflict with these 
objectives?
    Mr. Copland. I think it is generally in tension with them, 
and the SEC is----
    Mr. Huizenga. Sorry. Did you say, ``intentional?''
    Mr. Copland. ``In tension'' with them. Excuse me.
    Mr. Huizenga. In tension, got it, yes.
    Mr. Copland. So, I think there is a conflict there. And 
this Congress has expressly put on the SEC those words, 
``competition,'' ``efficient markets,'' and ``capital 
formation,'' that don't apply in terms of rulemaking in all of 
the other agencies.
    Mr. Huizenga. Beyond the direct costs, what are the costs 
incurred by companies in responding to all of the shareholder 
proposals focused on social or policy issues? There was a study 
that said 67 percent, or I believe it was 61 percent of all 
proposals were ESG-focused last year, which was a twofold 
increase.
    Mr. Copland. Yes. This is the important question because 
the direct costs for the large companies are relatively small 
in terms of how to respond, but the indirect costs are huge. 
The most valuable thing for your board of directors and for 
your chief executive C-suite officers is their time. And they 
have to focus a lot of time on these shareholder proposals that 
get put on their ballot every year at all these annual 
meetings.
    Mr. Huizenga. And very few large companies become public, 
right? They tend to be smaller companies. Would you view this 
as a detriment to companies going public?
    Mr. Copland. Yes, absolutely. When I first testified in 
front of the subcommittee of this body in 2006, we were talking 
about the capital markets. And the number of publicly-listed 
companies is less than half today what it was in the mid-1990s 
at the peak, and this is one of the reasons.
    Mr. Huizenga. Yes. What are the costs to shareholders and 
consumers who primarily are focused on financial performance 
and long-term value creation?
    Mr. Copland. It hurts their returns. We did a study on 
this. Tracie Woidtke at the University of Tennessee, an 
economist, looked at the cost of shareholder proposal activism 
from public pension funds and we saw a negative correlation--we 
did this 8 years ago--between that sort of activity and share 
valuation at the company. So at the end of the day, if you are 
investing for your retirement in your pension, you are hurt by 
this activity.
    Mr. Huizenga. It hurts investors. Okay. Thank you. At the 
beginning of this Congress, Chairman McHenry and myself, and 
Senator Tim Scott sent a letter to Chair Gensler at the SEC 
requesting documents and information on the climate disclosure 
rule. To date, we have largely received publicly-available 
information and precious little actual information that has 
answered any of those questions. In other words, the Commission 
has stonewalled Congress.
    Mr. Allen, can you speak to potential consequences if the 
SEC were to require companies to disclose non-material climate 
information? How might this affect investor decision-making and 
the overall efficiency in capital formation of the market? And 
again, the emphasis is on non-material.
    Mr. Allen. Yes. No, we think it will have a significant 
impact, a negative impact on investors. Investors already are 
overloaded with a lot of information, even if it is material, 
and it is difficult for them to parse through and identify what 
information is most useful for them. And if there is this flood 
of non-material information, particularly information related 
to emissions that is not material for picking a company, that 
is just going to further burden investors and make it more 
difficult for them to make effective buy/sell decisions. The 
Supreme Court had it right when it looked at the reasonable 
investor and the importance of materiality, and there is no 
reason for the SEC to depart from that standard.
    Mr. Huizenga. Okay. Thank you.
    Mr. Zycher, I want to address a couple of things to you. 
The climate rule attempts to assess the costs of the new 
disclosure requirements to individual businesses, but does not 
address the potential for increased energy costs more broadly 
to society. We have asked for this information, how it could 
potentially raise energy costs, but it has been very limited 
and no actual underlying analysis, which is what we are asking 
for. It does say on page 401 of the proposed rule that it could 
cause energy costs to go up. Are you aware of any analysis 
conducted by the SEC on the proposed rule's impact on energy 
prices, and do you agree it would be prudent to better 
understand those costs before proceeding?
    Mr. Zycher. No, I have not seen any analysis from the SEC 
staff or any other organization working with them on the effect 
of the proposal on energy prices.
    Mr. Huizenga. Just because they won't give the parameters 
for anybody else to do the analysis?
    Mr. Zycher. Yes. I just have not seen anything like that.
    Mr. Huizenga. Okay.
    Mr. Zycher. The problem is that there are two different 
components. One is----
    Mr. Huizenga. Unfortunately, my time has expired, but I 
will follow up and I would love to get your written answer.
    Mr. Zycher. Fine.
    Mr. Huizenga. With that, the gentleman from Missouri, Mr. 
Cleaver, is now recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Attorney General 
Ellison, welcome back. After 18 months----
    Mr. Ellison. Thank you.
    Mr. Cleaver. ----I made it up on the top level with the 
Chair. I am so proud of myself. We lingered down on that level 
for years together, but it is good to see you here, and I 
appreciate your work in your State.
    I am always worried about having a dichotomous discussion 
on climate change because what it tends to do--if, ``further,'' 
can be used here--is it further divides and damages our ability 
to solve problems. And we do have a problem, and we should be 
concentrating, from my perspective, on how we deal with this 
issue.
    In 2019, Phoenix had 103 days above 100 degrees. It is a 
fact, and we are arguing here primarily because this is 
argument heaven. And we have spent a lot of money to come to 
Washington to argue, and run TV commercials to get to 
Washington to argue. It would be much more productive if we 
were in here talking about how we deal with this issue, because 
it is not a question of whether it is going to happen, it is 
already happening, and we are going to have to deal with it and 
we are going to all have to deal with it, including companies. 
The only question is how bad it is going to be and which areas 
are going to suffer the most.
    For many companies and corporations, extreme weather events 
or even slight changes in regional weather patterns can affect 
their operating performance. This is especially true for 
insurance companies and also for companies that are focused on 
specific geographic regions. Some companies already include 
general disclosures about climate risk, but those disclosures 
are typically vague and don't provide investors with a good 
sense of the scale of the risk the companies will face in 
climate change, and what potential financial benefits there are 
to a company in disclosing financial and business risks.
    And what I am hoping, Attorney General Ellison, is that you 
can at least push us in a direction of how companies can comply 
with the ESG policies and still make progress and make profits. 
It is not one or the other; we can make both.
    Mr. Ellison. Certainly, you are right, Congressman. In 
Minnesota, we don't view consideration of ESG factors as in 
tension with risk-adjusted rate-of-return priority. We see it 
as something that we have to do to be careful, and it is not 
just environmental; there are also social and governance 
factors which need to be brought into consideration. The 
research we have turned up shows that my more-diverse board of 
directors actually is consistent with a more-profitable firm 
because we break out of this grouping model that sometimes 
undermines the ability to assess risk. In our experience in 
Minnesota, we have had a very successful State Board of 
Investment, and we prize our ESG risk consideration and think 
it is important to how we do business.
    Again, we don't lock ourselves in. Not every single 
decision is to favor some ESG fund. We are flexible. But I 
think you are absolutely right that to not look at these 
factors would be to put blindfolds on. And to take a look at 
these factors would be to put either a microscope or certainly 
a magnifying glass on a serious problem which impacts the 
pensioners for whom we are responsible.
    Mr. Cleaver. I wish I had time to have somebody answer the 
question about whether or not crisis creates innovation. Thank 
you, Mr. Chairman.
    Mr. Huizenga. You are welcome. The gentleman's time has 
expired. With that, I recognize the gentlelady from Missouri, 
Mrs. Wagner, who is also the Chair of our Capital Markets 
Subcommittee.
    Mrs. Wagner. Thank you, Mr. Chairman, and I thank all of 
our witnesses for being here. Attorney General Ellison, it is 
good to see you again. I appreciate the work that we have done 
together on----
    Mr. Ellison. Likewise.
    Mrs. Wagner. ----fighting the scourge of human trafficking 
and especially online sex trafficking.
    Mr. Ellison. Absolutely.
    Mrs. Wagner. I appreciate your continued efforts on that.
    Mr. Copland, under SEC Chair Gensler's leadership, the 
number of environmental and social shareholder proposals has 
increased dramatically. The shareholder proposal process, which 
has played a key role in meaningful corporate governance for 
decades, is being eroded by a minority influence over America's 
public companies at the expense of everyday average investors. 
If the reforms proposed today are not enacted, what will be the 
long-term consequences for retail investors?
    Mr. Copland. They are going to get a weaker return, right? 
There are two big problems here as I see it. One, you are going 
to hurt the returns for the average investor. It makes it more 
difficult for companies to run their business when you convert 
them into political platforms. The SEC has long understood 
this. I argue in my written testimony that the 14a shareholder 
proposal process is legally dubious to begin with based on what 
Congress has authorized the Commission to do, and based on the 
presumptive State law, which is not a race to the bottom, as 
Representative Sherman said. It is a race to the top as, as 
Chief Judge Winter argued in his seminal 1977 article. I 
clerked for him, and it is the most important corporate article 
of the last 50 years, but I argue that there is a problem with 
it anyway.
    But at least if you are taking the social things off the 
table and we are talking about whether we elect all our 
directors annually or how we elect our directors, you are 
talking about real governance issues that involve the 
corporation and not these environmental and social concerns. So 
yes, that is good, but the other cost is the cost to democracy 
itself, right? And that is why I wanted to emphasize that you 
have two small, privately-owned proxy advisory firms and asset 
managers that are principally passive index investing vehicles, 
not making affirmative buy/sell decisions, telling corporate 
America how to do their jobs. And that is an end run around the 
representative process that everyone in Congress will be really 
concerned about, in both parties.
    Mrs. Wagner. And to your initial point, too, sir, there are 
millions of Americans who invest their hard-earned dollars with 
the simple goal of achieving the highest return on their 
investment.
    Mr. Cunningham, based on your decades of experience, sir, 
in what ways can the shareholder proposal process be restored 
to better protect the economic interests of what I care about 
most, retail investors?
    Mr. Cunningham. Thank you for the opportunity to make some 
suggestions. I think many of the bills that you are considering 
would do so. I think we need to eliminate or filter out the 
special interest groups from hijacking the shareholder proposal 
process. And as Mr. Copland just said, it has been a very 
useful mechanism through which to improve fundamental 
governance practices in the country for 30 or 40 years, and 
that is the real legitimate and genuine purpose, to respect 
State law prerogatives in that space. So, any rulemaking that 
you can do or that the SEC could do to return it to focus on 
the corporation's interests, the shareholder's interests, and 
to filter out the special interest infiltration would be very 
useful.
    Mrs. Wagner. And their fiduciary responsibilities.
    Mr. Allen, how have proxy advisor errors, analytical flaws, 
and omissions been documented and reported by stakeholders, 
including the Society and its members?
    Mr. Allen. It is certainly a major concern for our members. 
We did a member survey in 2019, and it found that 42 percent of 
our members reported or noticed errors in their proxy research 
about their companies within the past----
    Mrs. Wagner. Forty two percent?
    Mr. Allen. Forty two percent was an astounding figure. We 
provided examples of those errors to the SEC in our comment 
letters in 2020 and 2021. Errors are bound to occur given the 
number of companies that proxy advisors are opining on. That is 
why we support a robust draft review process so companies have 
a reasonable opportunity to review draft reports before their 
investors start voting on that.
    Mrs. Wagner. When presented with these errors, how have the 
proxy advisors responded?
    Mr. Allen. In some cases, they do make corrections. In 
other cases, they will say, well, the error is not material, or 
they will say it is a difference of opinion rather than a 
factual error. And even when they do make corrections, some 
investors don't go back and change their vote decisions.
    Mrs. Wagner. Forty two percent of proxy advisor errors, 
flaws, omissions. It is reprehensible. I thank you all for your 
testimony. My time has expired, and I yield back, Mr. Chairman.
    Mr. Huizenga. Thank you. The gentleman from Illinois, Mr. 
Casten, is now recognized for 5 minutes.
    Mr. Casten. Thank you, Mr. Chairman. I want to get to a 
bunch of questions, but I want to just start, because I think 
we are in agreement, and I don't mean to be cute with time, but 
I would ask you just to raise your hand right now, each of you, 
if you agree with the statement that corporate executives are 
employees of, and therefore, directly accountable to, their 
shareholders. Do you all agree with that statement? I see some 
gray areas with some folks.
    Mr. Cunningham. Yes. They are employees of the company, and 
the shareholders own stock in the companies.
    Mr. Casten. Yes. And if I had put all my cash into a 
company, I would want to have a lot of say over what the people 
who are managing that were doing. Let's come back to your gray 
area, if we get there. I asked the question that way because I 
have just quoted Milton Friedman's theory of shareholder 
primacy, which is sort of the central proposition, so we agree 
with Milton Friedman. There is a rich conversation we could 
have about stakeholder capitalism, but we seem to be Milton 
Friedmanites today. That is fine. You wouldn't know it on this 
side of the room, because we had a whole bunch of debates about 
these uppity shareholders that are causing problems and are 
creating troubles for companies that don't want to be 
responsible to shareholders, but I digress.
    Mr. Copland, over the last 5 years, bond funds have 
significantly underperformed equity funds. Should investors get 
out of bond markets? Just yes or no, should investors get out 
of bond markets, given their underperformance over the last 5 
years?
    Mr. Copland. No.
    Mr. Casten. Over the last year, the Dow Jones Oil & Gas 
Index has underperformed the S&P 500 by almost 20 percent. 
Should investors get out of oil and gas?
    Mr. Copland. No.
    Mr. Casten. Okay. I asked you those questions because in 
April of this year, you wrote an op-ed in the New York Post 
entitled, ``Having beat oil to OnlyFans, ESG activists now 
focus on `big food,''' in which you said that the ESG bill is 
going to come due because of long-term economic impacts. If we 
agree on shareholder primacy, why should we take away investor 
choice with respect to that asset class, but not with respect 
to oil and gas, bond markets, or, frankly, any other asset 
class in which investors are free to invest?
    Mr. Copland. I don't think we should take away the ability 
to invest in an ESG fund. We ought to be able to invest in ESG 
funds. What I am worried about are passive index funds that 
aren't making buy/sell decisions, voting their shares in 
these----
    Mr. Casten. Hang on a second. You asserted in that article 
that ESG funds were delivering below-market returns. You didn't 
provide citations----
    Mr. Copland. I think in the long run, an ESG fund that 
screens its stocks is necessarily going to underperform its 
market benchmarks in the long run.
    Mr. Casten. On that basis, so are mid-cap markets. Every 
investment fund screens stocks for a certain class. People are 
free to get in those as they wish. There have been a bunch of 
State laws that have taken away the rights for investors to 
invest in ESG, which my colleagues here are trying to take away 
choice. Cut away all the other nonsense, and they are trying to 
take away choice. Do you know what it has cost in those States 
that have taken away choice? How much has it cost the Indiana 
Public Retirement System when their State passed a bill banning 
their pension funds from investing in ESG funds? Do you know 
how much it cost them?
    Mr. Copland. I would have to look very carefully at the 
study, which I have not read. I am sure you are going to say it 
has cost----
    Mr. Casten. It is $6.7 billion. How about the Kansas Public 
Employees Retirement System?
    Mr. Copland. I am not aware of the Kansas----
    Mr. Casten. It's $3.6 billion. The Texas County & District 
retirement system--$6 billion. These are huge amounts of money 
that are being lost to the working men and women in this 
country. And this is going to be complicated for some of my 
colleagues here who have a hard time with capitalism. If you 
take away choice, you reduce supply, and the price moves, 
right? These are the costs that we are asking our society to 
impose.
    Now, let's talk about some facts. In the last decade, coal 
use in the United States is down by 40 percent. We used to make 
50 percent of our power from coal. We now make more power from 
renewables. The fastest-growing vehicle segment is electric 
vehicles. Oil use is flat. Consumers given the choice about 
what to buy are choosing cheaper energy. Investors given the 
choice are following the money. Capitalism works.
    It is also really scary if you can't compete, but it is the 
only way that we stay competitive as a country, no matter how 
much the losers cry to their benefactors in Washington and say, 
``Can you please take away choice? Capitalism scares me. I 
don't want to compete fairly. I can't compete fairly.'' And 
yet, we are now sitting here having a debate, if you can even 
humor it with that, about whether we as a country are going to 
continue to support capitalism, and free markets, and 
competitive choice among investors.
    The party of Ronald Reagan, the party of Milton Friedman, 
is afraid to defend capitalism. You all ought to be ashamed of 
yourselves. But if it is partisan to defend free markets and 
competitive and investor rights, let's double down on the 
partisanship because it is the only way we move forward as a 
country. I yield back.
    Mr. Huizenga. The gentleman's time is about to expire. With 
that, the gentleman from Kentucky, Mr. Barr, is recognized for 
5 minutes.
    Mr. Barr. If ESG is capitalism, why do we need the 
government to interfere in the free market? That is what ESG 
is. That is what the SEC is doing. One of the bills noticed for 
this hearing is the Ensuring Sound Guidance (ESG) Act, my bill 
that amends the Investment Advisers Act of 1940, which provides 
that pecuniary factors may not be subordinated to or limited by 
non-pecuniary factors in determining whether an investment 
advisor is acting in the best interest of a customer. That 
doesn't take away choice. It merely says that if you want to 
invest in an ESG fund, it should be disclosed that this fund is 
not designed to maximize returns, but it doesn't take away the 
choice.
    Now, as you have heard earlier, ESG defenders in this 
hearing and elsewhere have responded with hysterics, even 
invoking Trotsky to conflate non-owner stakeholders, woke 
institutional investors, and proxy advisory firms for bona fide 
shareholders. There is a difference between, as Mr. Cunningham 
has pointed out in his prepared testimony, an institutional 
investor and the actual beneficial owner of the capital. And by 
and large, beneficial owners of capital in America, the retail 
investors who are the actual shareholders don't care about ESG. 
They don't. The Financial Industry Regulatory Authority (FINRA) 
and the University of Chicago did a survey of retail investors 
in America, the owners of the companies, not the institutional 
investors, the actual beneficial owners of the capital, and 
less than a quarter of them even know what ESG stands for--
materiality, they don't care; they want returns.
    Let's get to the crux of this. Mr. Zycher, and Mr. 
Cunningham, you heard my friend from Minnesota, my former 
colleague, say ESG best practices and high market returns can 
go hand in hand. My friend from Illinois, who is a defender of 
ESG, says this all the time. What is it? Is ESG investing 
actually compatible with maximizing pecuniary returns, Mr. 
Cunningham?
    Mr. Cunningham. The temperature has certainly risen in the 
room. ESG investing is a loaded term, and if you are just 
solely guided by certain aspects of it, that is not the route 
to long-term economic prosperity. It is probably two different 
lanes.
    Mr. Barr. Mr. Copland, is ESG investing consistent with 
maximizing returns? When social and political issues are 
prioritized over financial performance, is that compatible with 
maximizing returns?
    Mr. Copland. It is incompatible with maximizing shareholder 
returns in the long run.
    Mr. Barr. Mr. Zycher?
    Mr. Zycher. It is incompatible in the long run because 
imposing artificial constraints on investment choices cannot be 
consistent with the maximization of long-run returns. I will 
say, however, Congressman, that is not quite the right 
question. The right question, which we have kind of dodged in 
this hearing thus far, is not whether people have the right to 
invest in ESG initiatives, however those are defined. The issue 
is whether regulatory agencies should be creating conditions in 
which they are forced to do so. And that is the crux of the 
problem, is that the SEC has promulgated regulations which have 
led to such an environment in which firms are forced to use 
proxy advisors. They are forced to adopt the recommendations of 
the proxy advisors. The proxy advisors have no responsibilities 
in a fiduciary sense to the shareholders and bear none of the 
attendant costs. That is the problem.
    Mr. Barr. Yes, I agree with you. I totally agree with you, 
and that is why this is not the free market; it is government 
intervention to distort the free flow of capital.
    Mr. Copland, let me finish with you on what the prudential 
bank regulators are doing. The Fed is pursuing a Pilot Climate 
Scenario Analysis program. The OCC and the FDIC have 
promulgated draft Principles for Climate-Related Financial Risk 
Management. The NCUA has begun separately assessing climate 
risks. Is this effort about assessing climate-related financial 
risk, or is it about creating financial risk for energy 
companies by redirecting capital away from those energy 
companies?
    Mr. Copland. It is absolutely about the latter. And the 
access to free credit, or not to free credit, but the free 
access to credit so that everyone on an equal plane can compete 
for credit is really important. And we heard across the aisle 
some were concerned----
    Mr. Barr. Yes. And in my remaining time, I will just say I 
don't understand why anyone would say this is about assessing 
climate risk. Increasing energy prices does not stabilize the 
economy. Depriving energy companies access to capital does not 
promote financial stability.
    Mr. Huizenga. The gentleman's time has expired. With that, 
the gentlewoman from Texas, Ms. Garcia, is now recognized for 5 
minutes.
    Ms. Garcia. Thank you, Mr. Chairman. First, I want to point 
out that our historic Diversity and Inclusion Subcommittee, of 
which I was Vice Chair last Congress, has been eliminated this 
Congress. And here we go again with the Republican leadership 
denying climate change, and denying that racism and sexism 
still exist in our society by trying to eliminate the critical 
and transparent ESG disclosures. To be clear to all the people 
watching at home, ESG disclosures include information like 
quantitative and qualitative disclosures related to climate-
related risks, and human capital disclosures like diversity and 
inclusion. Bottom line, it is about transparency.
    All the Republican-led bills discussed today are just more 
attempts to deny the truth and ultimately eliminate diversity 
and inclusion initiatives just because Republicans think that 
they are, ``woke,'' whatever that means. By eliminating 
corporate diversity and inclusion efforts, Republicans are 
directly harming communities like mine in my district, which is 
77-percent Latino and over 90-percent people of color.
    Republicans are denying communities like mine the 
opportunity to be fully represented. Corporate America and, in 
particular, corporate American leadership, boardroom 
executives, and sometimes even the general workforce do not 
always reflect the true diversity of the American people and 
the people they serve. This is part of the reason ESG 
disclosures are so very important.
    Again, ESG disclosures are about transparency. This 
benefits workers, consumers, and investors. The public has a 
right to know this information. In fact, research shows that 
companies that are more diverse are more successful. Companies 
that fail to prioritize diversity and inclusion are putting 
themselves and shareholders at a financial disadvantage. As I 
mentioned earlier, the disclosures we are discussing today 
include information on human capital, or what I like to call, 
worker treatment or workforce investment.
    In an attempt to combat some of these bad Republican bills, 
I am introducing a bill today called the Workforce Investment 
Disclosure Act. This bill was led by Congresswoman Axne last 
year, and I am proud to be the lead this year. This bill 
requires publicly-traded companies to disclose, annually, 
information regarding workforce management policies, practices, 
and performance. This includes disclosures on demographic 
information, data on temporary and contract workers, employee 
turnover rate, employment skills and capabilities, workforce 
health, safety and well-being, findings of discrimination, and 
finally, employee compensation benefits and incentives.
    This bill, quite frankly, should be a no-brainer. Again, it 
is about transparency, and even executives agree on the 
importance of human capital and workforce investment. In fact, 
71 percent of public company executives identify human capital 
as one of the most important sources of economic value within 
their companies.
    I also want to remind my Republican colleagues that many of 
these ESG disclosures have a direct impact on workers, too. We 
have spent a lot of time talking about investors today, and I 
want to bring it back much like Mr. Casten did. This is really 
about the workers. As Attorney General Ellison noted in his 
testimony, public employees in his State trust him with a 
portion of their salaries for a return for a secure retirement. 
This is about our workers. It is about their choice. It is 
about transparency.
    Again, my district is largely working-class, and I urge my 
colleagues to remember that when workers are happy, paid well, 
and treated with respect, companies benefit and profit, and it 
helps ensure stability. If companies are doing what they are 
supposed to be doing--prioritizing diversity, and treating 
workers well--then there is no need to be afraid of disclosure.
    Mr. Attorney General, I wanted to follow up with a 
statement that you made about Texas. Tell me more about the 
$532 million a year in interest rates that Texas lost when they 
passed the anti-free market legislation? Would some of these 
policies that are being discussed today on these bills cause 
that same kind of impact on the taxpayers?
    Mr. Ellison. Thank you, Congresswoman. Let me tell you, the 
information that my research yielded is that that $532 million 
loss in 1 year is a result of a requirement that any banks that 
did not want to invest in guns or oil industry products would 
be punished. That meant there had to be a fairly abrupt 
reallocation of resources, which led to losses to the tune of 
about $532 million in a year.
    Ms. Garcia. Yes. I think they were going after businesses 
that come to Texas.
    Mr. Hill. [presiding]. The gentlewoman's time has expired.
    Ms. Garcia. Thank you. I may follow up, Mr. Chairman, with 
a written question. Thank you.
    Mr. Hill. Of course.
    The gentleman from Tennessee, Mr. Rose, is recognized for 5 
minutes.
    Mr. Rose. Thank you, Mr. Hill, and thanks to Chairman 
McHenry for holding this hearing, and thank you to our 
witnesses for being with us today.
    Mr. Allen, earlier this year, ISS, the largely unregulated, 
German-owned proxy advisory firm, announced a new, ``board-
aligned voting policy.'' An ordinary reading of the name, 
``board-aligned,'' would suggest that under this policy, ISS 
would recommend votes in line with how a company's board would 
vote, but that is not exactly true under the policy.
    Mr. Allen, could you explain how the name of ISS's new 
policy is misleading?
    Mr. Allen. Thanks for the question. And no, certainly, when 
we first heard about this new policy--it came out right after a 
group of Republican Attorneys General wrote letters to ISS and 
Glass Lewis expressing their concerns about the lack of 
alignment with the fiduciary duty of investors. I heard 
somebody from another organization refer to it as a, ``red 
State voting policy.'' But upon closer review, and we compared 
it to the ISS benchmark policy, we found that with the 
exception of a handful of environmental and social proposals, 
the policy was essentially identical to the ISS benchmark 
policy, including ISS policies on board diversity, on executive 
compensation, and on takeover defenses. So, somebody opting for 
this policy, that is an ISS client, would be misled if they 
were opting to have their shares voted in accordance with 
management recommendations or board recommendations.
    We wrote a letter to ISS expressing our concern. We also 
shared it with the SEC and members of this committee, and in 
our view, this is something about which the SEC should be 
concerned. The SEC is doing a rulemaking on fund names. These 
custom or specialty policies are like ISS's main product. So, 
we think it should have an accurate name and not something 
misleading, like, ``board-aligned.''
    Mr. Rose. Thank you. Mr. Allen, is ISS transparent about 
the criteria that it uses to determine whether a company's 
environmental and social disclosures are adequate?
    Mr. Allen. The ISS, to its credit, does do an annual policy 
survey, but other aspects of their policy-setting are less than 
transparent. Some of their policies on executive compensation, 
executive plans, don't fully disclose their methodology because 
they want companies to buy their subscription services. So, on 
some matters, they are, and on some matters, they aren't. It is 
a mixed bag, but certainly we think that there should be more 
transparency. ISS should provide more time for companies and 
others to comment on their proposed policies every year. 
Usually, it is a short period of time, and there could 
certainly be improvements in that area.
    Mr. Rose. Thank you. Mr. Copland, I would like to discuss 
the overlap between the SEC's rulemaking on climate-related 
disclosures and the SEC's recent Staff Legal Bulletin 14L, and 
time is short, so I am going to try to move fast.
    Mr. Copland, is it true that the SEC's rulemaking on 
climate-related disclosures requires large publicly-traded 
companies to disclose Scope 3 emissions if they have made 
climate-related targets or commitments?
    Mr. Copland. Yes.
    Mr. Rose. Thank you. Mr. Copland, under the SEC's recent 
Staff Legal Bulletin 14L, significant social policy issues, 
like climate-related proposals, no longer need to have a nexus 
between an individual company and the policy to be included in 
a proxy statement. Do you believe this will make it easier for 
climate-related commitment proposals to make it onto a 
company's proxy statement?
    Mr. Copland. Yes, and it already has.
    Mr. Rose. Thank you. I tie these changes together because 
climate activists, like As You Sow, are trying to make it more 
likely that companies make climate-related commitments, and 
thus, must disclose Scope 3 emissions under the climate 
disclosure framework. I will note that As You Sow, alone, has 
filed 25 climate commitment-related proposals this year.
    Mr. Allen, one of the bills attached to this hearing would 
eliminate the significant social policy issue exception to the 
ordinary business exclusion in Rule 14a-8(i)(7). Can you 
discuss why SEC staff should not be making subjective judgments 
about whether a particular shareholder proposal is a 
significant social policy issue?
    Mr. Allen. We think that is an entirely subjective 
analysis, and it is beyond the SEC's mandate to make such 
determinations.
    Mr. Rose. Thank you. I see time is short, so I yield back 
the balance of my time.
    Mr. Meuser. [presiding]. The gentleman yields back. The 
gentleman from Nevada, Mr. Horsford, is now recognized for 5 
minutes.
    Mr. Horsford. I want to thank the chairman and the ranking 
member for the hearing today. While I disagree with the posture 
of the hearing, these are issues that are actually imperative 
to our financial sector and really are a business imperative. 
They are an imperative because it is customer-driven, and it is 
around new products that my colleagues are so quick to deride. 
They only exist because there is a market for them, and I just 
find it completely interesting that somehow the market can't 
lead in this particular area.
    Why would we deny wide swaths of investors the information 
they care about when they are making investment decisions, 
especially when this is information already exists, in many 
instances? We are spending our time obsessing over manufactured 
culture wars instead of doing the work of the American people 
who sent us here. Our focus should be on the actual issues that 
our country faces, such as expanding access to capital for 
small businesses, bolstering financial literacy efforts to 
build a more-inclusive financial sector, or addressing the 
ever-skyrocketing cost of housing, because I know that issues 
like housing are the problems that my constituents grapple with 
around the dinner table, not over dictating how investors 
decide how to manage their money.
    Actually, I am glad that we have an opportunity to discuss 
just how detrimental it could be if we blind ourselves to the 
very real risks associated with a company's mismanagement of 
social, environmental, or corporate governance factors. I am 
really baffled that I have to say this, but I believe that our 
nation's investors and other financial services professionals 
know best how to manage their risk. They are in the business of 
managing risk in all of its forms, and any risk that these 
professionals deem to be material should be included within the 
decision-making process. Without considering a company's 
exposure to climate change or the ongoing implementation of a 
meaningful diversity and inclusion strategy, shareholders and 
investors will bear the cost for any potential catastrophes.
    These are costs that managers must be able to price into 
their investment strategies, but the only way that is possible 
is through our work here to promote principles-based 
disclosures. These investors at least deserve to have access to 
complete information before making their own decisions on where 
they want to invest their money.
    Attorney General Ellison, it is great to see you.
    Mr. Ellison. Likewise. Thank you.
    Mr. Horsford. Thank you for taking the time to be here. I 
hope that you can help me understand where this supposed ESG 
push is coming from. At the Federal level, or in your home 
State, have you seen these feared mandates or that the 
government's focus is truly on costly non-material issues at 
the expense of the U.S. public markets? Is that something that 
you are seeing?
    Mr. Ellison. No. It is coming from pension beneficiaries. 
It is coming from members of our community. It is coming from a 
diverse group of Minnesotans who want the Minnesota SBI to 
think about governance, to think about social factors in 
certain considerations, and also to think about the 
environmental impacts. As I noted before, it is a real example 
that one of the companies that the SBI was invested in actually 
owned a plant where 14-year-olds were being used to clean a 
kill room floor in a meatpacking plant. Now, it might be 
cheaper and add to the bottom line to use 14-year-olds to clean 
your kill room floor in your meat packing plant, but it is not 
legal and it certainly is exploitive.
    Investors want to know that kind of information. They think 
that it is important, and people will come to our SBI meetings 
and demand that we do something about it, so it is not like we 
are looking for these things. We just think it would be 
important for a company to say, okay, we are looking at child 
labor, we are looking at human trafficking, we are looking at 
governance. Thank you.
    Mr. Horsford. And the last issue that I won't have time to 
speak about is diversity, equity, and inclusion. And I will 
just close my comment on this issue by saying that diversity is 
a strength for these companies. It is good business for 
investors to know these strengths, and even more importantly, a 
company's weaknesses prior to investing. With that, I yield 
back.
    Chairman McHenry. The gentleman's time has expired. The 
gentleman from Wisconsin, Mr. Steil, is now recognized for 5 
minutes.
    Mr. Steil. Thank you, Mr. Chairman. I would like to thank 
you for calling today's hearing.
    I think it is really important that we dig in to how our 
Federal agencies are weaponizing Americans' retirement accounts 
to achieve political objectives that can't be achieved through 
the ballot box. I am concerned about Americans' retirements 
being used for purposes other than analyzing risk and return. 
And, in particular, we see a duopoly of proxy advisors whom, I 
think, have a disproportionate voice in the voting of shares as 
more and more Americans are turning to index funds, passive 
investments, in particular, through asset managers across our 
country.
    Mr. Cunningham, as we have seen a spike in shareholder 
proposals, fund managers seem to be relying more and more on 
this duopoly of proxy advisors, in particular, ISS and Glass 
Lewis, which dominate the industry. And the impact that is 
having--my legislation, and I think a really important piece 
that I have been working on, is that there should be more 
transparency as relates to the process with which these proxy 
advisors are reaching their conclusions. Do you think there is 
a reason that these proxy advisors shouldn't have to disclose 
their internal methodologies and the staff qualifications that 
they have as they are making these recommendations?
    Sorry, I was looking at you, Mr. Allen, and I am asking Mr. 
Cunningham. We will start with Mr. Cunningham, and I will come 
back to you, Mr. Allen.
    Mr. Cunningham. Thank you very much. I think the rise of 
the proxy agents, proxy advisors was a response to the 
explosion of index fund investment. The index fund business 
model prevents those firms from studying every company and 
evaluating every subject. The proxy advisors grew up to provide 
that service, and initially it was an attractive thing to do, 
but they are unsupervised, unregulated, and they owe no 
fiduciary duties to American investors. They have no obligation 
to disclose conflicts of interest they see. They have no 
obligation to explain why their recommendations are in the best 
interest of investors. They are not required to fact check 
their recommendations with companies.
    Mr. Steil. I take it from your comments that you think they 
should have to do all of these things, right?
    Mr. Cunningham. Yes, and the Congress has studied this 
industry for 13 years.
    Mr. Steil. Is there a reason that Chairman Gensler struck 
down the rule made under former Chairman Clayton that was 
reviewed and analyzed, to put these proxy advisors into a form 
where they would have to disclose? Is there a reason that 
Chairman Gensler should have done that other than to try to 
continue to allow these proxy advisors to hide what they are 
doing from the American people?
    Mr. Cunningham. I supported the 2020 rule revision, which 
was hard-fought and a compromise with the proxy advisors----
    Mr. Steil. I think it should have gone further, but should 
Chairman Gensler have struck it the way that he did?
    Mr. Cunningham. It was a compromise, worked out over a long 
period of time, and it was a surprise that Chairman Gensler----
    Mr. Steil. You take it as a surprise. I will take it as a 
bad action. Mr. Allen, do you think that Chairman Gensler 
should have struck the rule on proxy advisors to bring them 
into the light rather than allow them to continue to not have 
to disclose their methodologies and practices?
    Mr. Cunningham. No. I supported the 2020 rule----
    Mr. Steil. Let me come to Mr. Allen on that.
    Mr. Allen. No, we completely disagree with the SEC's action 
to reverse the 2020 rules. We think there were no new 
circumstances, no new facts, other than just that opponents of 
the rules weren't happy with them.
    Mr. Steil. I agree with you, and as we look at this, what 
happens when proxy advisors give bad advice? We can take the 
Travelers example, where a proxy advisor recommended what would 
have been an illegal action and voted in favor of that, and 
then, we see a robo-voting move forward. And we see over 40 
percent of these asset managers agreeing with an illegal action 
that would have forced Travelers to re-price their insurance 
based on race, which is illegal, in States across our country. 
What are the ramifications for that?
    Mr. Allen. It has serious ramifications for Travelers and 
other companies in those situations----
    Mr. Steil. But what are the ramifications? I agree that it 
does for Travelers and for companies across our nation that are 
fighting against being told to perform illegal actions. What 
are the ramifications to ISS and Glass Lewis for giving this 
disastrous advice? Are there any?
    Mr. Allen. There really aren't because part of the problem 
with the duopoly is that their clients don't really have many 
other options.
    Mr. Steil. ISS and Glass Lewis are unaccountable for their 
bad behavior. Is that right, Mr. Copland?
    Mr. Copland. Yes.
    Mr. Steil. And, Mr. Zycher, should this duopoly remain 
unaccountable to the American people?
    Mr. Zycher. I don't believe so, but I do believe that, 
again, the major problem is the SEC regulatory environment that 
forces the private sector to use them. Were that not in 
existence, I think the transparency problem also would 
disappear.
    Mr. Steil. Yes. I would love to see this duopoly broken up 
and more players in this space, but I remain incredibly 
concerned that the duopoly we have in the proxy advisor space 
is pushing forward this agenda. It is problematic for 
Americans' retirements because it is allowing America's 
retirement funds to be weaponized for political purposes rather 
than to be used to actually analyze risk and return. Mr. 
Chairman, I yield back.
    Chairman McHenry. The gentleman yields back. The gentleman 
from California, Mr. Vargas, is now recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Mr. Chairman. I appreciate 
the opportunity and I also want to thank the ranking member and 
these five distinguished gentlemen for being here today. Thank 
you very much.
    Sometimes, timing is everything, and this week, the 
newspaper headlines have been screaming about climate 
disasters--The New York Times: floods, fires, withering heat. 
Climate change brings new disasters every day. Flooding closes 
roads and churns through much of Vermont. The New York Times: 
the heaviest rain ever in Japan's south sets off floods. Heat 
wave may be the longest ever and temperatures will likely 
increase. Northeast storms dumps over 2 months' worth of rain 
on Vermont. Helicopter and boat rescues underway across a 
devasted Vermont. Do any of you gentlemen think that human 
actions with respect to the use of fossil fuels have 
contributed to these climate disasters? And you can start in 
any order you would like. Yes, sir, but just don't go long 
because I don't have a lot of time.
    Mr. Zycher. If you look at the peer-reviewed literature, 
what you will learn is that since the end of the Little Ice 
Age, global temperatures have risen about 1.1 degrees, of which 
roughly half is due to increasing atmospheric concentrations of 
greenhouse gas emissions. So the narrow answer to your question 
is, yes, mankind's activities have influenced the climate, and 
we can detect those effects. The next question is, are those 
effects large and is there evidence of a crisis? In the sense 
of the several examples that you have cited, the answer is, no.
    Mr. Vargas. Okay.
    Mr. Zycher. There's no evidence of a crisis.
    Mr. Vargas. No evidence of a crisis.
    Mr. Zycher. It is not the same as saying that----
    Mr. Vargas. Right, I get it.
    Mr. Zycher. ----there is no evidence that anthropogenic 
emissions have had an effect--they have.
    Mr. Vargas. Right. It is not a crisis, and you wouldn't say 
that the burning of fossil fuels has been a large part of the 
crisis that we do see.
    Mr. Zycher. I don't think we see a crisis and, therefore, I 
don't think fossil fuels are a problem----
    Mr. Vargas. Fair enough. Anyone else want to give it a 
shot? Yes, sir?
    Mr. Copland. Yes, I think that human activity has had an 
impact on the climate, and I think there is at least a 
theoretical link between some of that activity and certain 
climate patterns that we may or may not see. I also think, 
however, that the human cost in terms of loss of human life 
over the last century from climate-related events has gone 
dramatically down, and that is because of the broad economic 
growth that we have seen in our country. Therefore, I think it 
is very important that we consider that economic growth in our 
capital markets and financial regulatory structures a part of 
that so that we can remain a wealthier country and more 
resilient to climate impacts.
    Mr. Vargas. Okay. Anybody else? Mr. Ellison?
    Mr. Ellison. I would say certainly human activity has 
contributed to a chaotic climatic environment. There is no 
doubt in my mind, and I would disagree that it is not causing a 
crisis. I think it is, and I think it is causing a crisis as it 
relates to agriculture, species, and weather events, and I 
think it is a serious problem we have to address.
    Mr. Vargas. And, of course, most of the scientists are 
saying it is a crisis, and it is because we are burning fossil 
fuels. How can that not be material? That is why investors want 
to know, what is your company doing? Is it investing in a way 
that is responsible, and, more importantly, is your company 
going to be around for a while or not, because you are in a 
situation where you are not paying attention to these risks, 
and these risks are real. And that is why so many people want 
to know about this.
    And timing is everything. I can't think of a worse time to 
be trying to pass bills against environmental issues than right 
now when the headlines are screaming about these climate 
disasters. Timing is everything. It really is fascinating to me 
that these bills are coming up right when the scientists are 
saying this is a disaster and human beings are causing it 
because of the burning of fossil fuels. And with that, I thank 
you, and I yield back.
    Chairman McHenry. The gentleman yields back. The gentleman 
from Texas, Mr. Williams, is now recognized for 5 minutes.
    Mr. Williams of Texas. Thank you, Mr. Chairman, and thank 
all of you for being here. When I go home to Texas, I am a car 
dealer. I have employed hundreds of people over 52 years, so 
when I am talking to business owners back in my district, I 
know what they are going to say. And they say they are 
concerned about the SEC's push to implement costly 
environmental, social, and political regulatory requirements 
which require them to disclose climate-related information that 
is not relevant or material for their companies.
    Now, businesses are already struggling to operate within 
tight margins, with high interest rates, and are seeing their 
profits erode, so an increase in compliance costs could be even 
more of a tipping point to their future. The SEC's proposed 
climate requirements will cost companies millions for them to 
ensure they comply, and I am worried this proposal will 
discourage companies from even getting into business or 
entering or staying in the public market, which will hinder 
competition, stifle economic growth, and affect jobs.
    The biggest issue is that the SEC does not even have the 
legal authority--and we have talked about that today--to 
enforce climate-focused regulations, and this proposal exceeds 
the SEC's intended mission and their statutory authority. And 
it is the job of Congress to set an environmental policy, not 
unelected bureaucrats. The fact is the Biden Administration--
here we go again, Bidenomics--does not have the votes to pass a 
climate agenda through Congress, so they are trying to push 
climate-related policy through financial regulators. And this 
committee is tasked with overseeing the SEC, and we must rein 
in the abuse of the rulemaking process before they cause any 
further damage to Main Street America.
    Mr. Copland, if the SEC continues to operate outside of 
their statutory purview, how will their proposed climate 
disclosure rules negatively impact financial institutions and 
small businesses, and what will the implications be on the U.S. 
public market?
    Mr. Copland. Assuming that they get a rule enacted and it 
is not overturned in court, and I predict it probably would be, 
but assuming they have an operative rule that does what they 
are calling for initially, things like Scope 3 emissions, the 
financial institutions are going to have general counsels, 
right? And the financial institutions' general counsels are 
going to say, how are we going to comply with this rule?
    And when you start figuring out how we are going to comply 
with this rule, well, okay, we are going to ask the car dealer, 
or we are going to ask the family farmer that Representative 
Scott was talking about, and we are going to say, you have to 
tell us all of your climate impacts. And you don't have teams 
of economists, you don't have teams of analysts to do this, so 
you are going to lose access to credit. You are going to lose 
access to business. And so, it is going to be potentially 
devastating to a lot of small businesses and family farmers if 
this were to be enacted and actually enforced.
    Mr. Williams of Texas. Yes, these people can't afford 
lawyers. They can't afford it, these folks, so it is 
devastating. Shareholder engagement is one of the most 
important parts of corporate governance. Now, however, 
shareholder proposals have begun to try and hijack boardrooms, 
and we talked about it this morning, and turn them into 
platforms for political agendas. And it comes as no surprise 
that the SEC, which governs this process, has been instigating 
these groups to submit proposals that do not align with a 
company's interests or core duties. It is the duty of an 
institution to protect the financial interests of all 
investors, not just a particular group that is trying to be the 
loudest in the room. And this process must be revised to ensure 
that companies can protect the interests of real shareholders.
    Mr. Copland, could you elaborate on the effects that 
partisan and political shareholder proposals have on an 
institution's ability to create value for all shareholders, not 
just one select group that is trying to advance a radical 
agenda?
    Mr. Copland. The reality is, why do we even have dispersed 
stock ownership in corporations? What economists will call 
agency costs are actually higher for this type of equity 
ownership in many regards, but what they do do is align around 
shareholder primacy. People brought up Milton Friedman--align 
interest around a single variable, share value, and it makes it 
easier to do business. When you start making each boardroom a 
political football field, then it becomes hard to be an 
efficient business and do your job. The folks in this body know 
that this body isn't known for its efficiency, so making a 
political football field out of every business is not a good 
way to run all of our businesses.
    Mr. Williams of Texas. I have limited time, so I will 
shorten my question. Mr. Cunningham, could you expand on the 
effects of financial regulators forcing ESG policies on the 
private sector? What effect will that have on retail investors 
and their ability to grow their own wealth?
    Mr. Cunningham. Yes. The genius of corporate law is that 
shareholders get to buy stock, and then they have no duties. 
They don't have a fiduciary obligation. They don't have to 
vote. They don't have to do anything but elect a board of 
directors, which is the fiduciary body and the overseers of the 
corporation, and that is the body that should make these 
decisions. The shareholders should not be telling the managers 
what to do or telling the board what to do. When a small subset 
of shareholders do that, they will hurt the other shareholders.
    Mr. Williams of Texas. Everybody is an expert. My time is 
up, and I yield back.
    Chairman McHenry. The gentleman yields back. The 
gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5 
minutes.
    Ms. Tlaib. Thank you so much, Mr. Chairman. I am really 
incredibly taken aback. I always look at the witnesses who come 
before us and try to figure out what lens they are bringing, or 
their lived experience, or the people that they serve. And when 
I found out, and again, these numbers are pretty old, but in 
2018, ExxonMobil gave the American Enterprise Institute 
$160,000, bringing the total to $4.65 million. No, keep shaking 
your heads. I want to know why we are here, because in Detroit, 
we had the hottest days. Do you know anything about Cities like 
Detroit, New York, or Chicago, where working-class people are 
literally suffering because we do nothing about climate? 
Nothing. We don't give them the resources we put aside. Why? 
Because certain industries want to deny that we even have 
climate risks and how that impacts people's retirement, and how 
it impacts our economy. It is going to happen. Guess what? You 
are going to come right back here and want us to bail you out 
again, literally.
    Look at the National Flood Insurance Program, that I talk 
to our chairman about all the time. First of all, it is a form 
of socialism, but okay, that doesn't exist, because those are 
the big mansions on the ocean and those folks get bailed out, 
but my folks, literally their basements, everything get 
flooded. They are literally suffering every single day.
    This whole, ``ESG,'' whatever, debate, is a fabricated 
political issue. We already know. Luckily, there are folks 
within your industry who have actually spoken up and said this 
is BS, that particularly the fossil fuel industry, in some 
cases, is trying to protect their short-term profits at the 
expense of workers, retirees, and communities. Shake your 
heads, but $4.65 million since 2018. This is since 1998. It is 
a lot of freaking money, and that is only just the recent 
amount of money, and I don't even know what everybody else is 
taking.
    But Attorney General Ellison, one of the things that I am 
concerned about, and again, pensioners and families saving for 
retirement are concerned about, is the performance of companies 
over the decades. They really are. They sincerely are. They 
actually don't trust them. I have a lot of retirees who don't 
trust them. They are pretty good, so for them, transparency is 
a wonder. This is exactly what they need to be talking about. 
This is exactly what they need. They want to be able to access 
that information. They need to protect their investments.
    Attorney General Ellison, can you touch on the ways that 
ESG disclosures promote long-term value creation instead of 
risky or short-term profit-seeking initiatives and movements 
that they are supporting?
    Mr. Ellison. Congresswoman, I think they drive a 
conversation that is essential. I think they drive a dialogue. 
They allow questions to be asked and answered. I agree, 
immaterial, truly immaterial information, that is one thing, 
but how climate is impacting people in an urban environment, 
like Detroit, where I grew up, is everything. People die when 
it gets too hot, for too long, but also, the issue of 
governance is critical. People want to know that we are getting 
all points of view in this conversation so that we can assess 
the risk all the way on a 360 level, and certainly, in the area 
of social does matter to folks. It certainly is an important 
thing. It is not a mandate, but it is a critical set of 
considerations, which I think improve shareholder value. The 
risk adjustment is more accurate, I think.
    Ms. Tlaib. It is the anti-ESG crusaders here, or simply, 
for me, carrying the water of corporations, that don't really 
want to disclose long-term risks that their businesses face, 
and it is true. I don't know how much data we need, how many 
more studies. I know my folks are really tired of the studies, 
because it reveals everything we are supposed to know, but we 
do nothing about it. We are saying, not now, not now, not 
really. And I don't think that there is any care of whether or 
not the heat or climate challenges are really impacting human 
life or certain sectors of the business.
    And I know, Attorney General Ellison, you are going to give 
me some examples of material risks related to workplace safety, 
racial equity, and workers' freedom of association that ESG 
disclosures might reveal. We can continue talking about that, 
but for me, you lose credibility, like the Manhattan Institute 
for 2 decades taking money from Exxon. You lose credibility 
when you are taking, literally, money from the people who don't 
think the challenges are actually here, that we actually have a 
climate crisis. You lose credibility.
    You have to come here, and you have to understand this is 
real and it is happening. And saying it is not happening or how 
somehow it is impacting the private sector and so on, guess 
what? You are all going to end up right here asking us to bail 
you out, so do something about it now. Don't wait, and try to 
gaslight the American people that ESG is not important.
    Chairman McHenry. The gentlelady's time has expired. The 
gentleman from South Carolina, Mr. Norman, is now recognized 
for 5 minutes.
    Mr. Norman. I want to thank each of you for taking the time 
to be here. As has been noted, for the SEC to basically dictate 
the 500-page climate disclosure rule is idiotic. The SEC 
doesn't have the power or the authority, nor is it granted by 
Congress. To hear some of the statements that have been made, 
for example, the thing about capitalism taking away choices--
Andy Barr brought the exact point up, why is government needed 
then? Why is government needed to dictate that? Why is 
government needed to dictate electric cars--I turned on the 
news this morning, and saw that electric cars are sitting in 
the lots. The public doesn't want them, particularly when the 
batteries to run them--cobalt, lithium--come from China, as 
well as aluminum. That is stupid. It is very interesting when 
you talk about ESG requirements disclosure, make sure the 
shareholder knows everything about it--that hasn't been done.
    I am a real estate developer. If I put together a proposal 
for you for real estate, you would want to know every line item 
and where the money goes. Where is that in the disclosures as 
it relates to ESG? It is not there. I haven't seen it. I am 
talking about the money that Ms. Tlaib is talking about, the 
billions of dollars. Where is it actually spent? Where do the 
dollars go? They go to groups that have nothing to do with the 
floods she is talking about and the hurricanes. A man is not 
going to control that. It is idiotic to think that.
    I had a group of meteorologists in the other day who are 
experts and I asked them, how can we control the floods and the 
hurricanes? They laughed me out of the building, and it was at 
that time that they said, you are not. I said, well, how about 
Al Gore, who brought up that the oceans were boiling, and they 
started laughing. He worked himself up into a frenzy. We have 
yet to have a hearing where you had two sides, the Al Gores of 
the world and the experts, to do a counterbalance. I have yet 
to see a disclosure where the monies that the corporate boards 
are, I guess, adhering to have a line item, this is the firm 
that is getting this money that is going to control the 
environment. I have yet to see that. I have to do that every 
day in my world.
    Mr. Copland, ``efficiency,'' is not exactly a word that is 
ever used in Congress, because Congress is not efficient. There 
are two things that I think Congress has a role in, one being 
diversity, not of race and ethnicity, but diversity of ideas 
and different opinions. That is what the boards have to have. 
They have fallen in this line of just complying because it is 
the politically-correct thing to do that this Administration is 
forcing on the American people.
    And the other thing I would suggest is, if we are going to 
require full disclosure for the taxpayers who invest, for the 
small businesses who buy those index funds, let's have a line 
item of where that money is going, who is getting it, and 
explain to me how it is going to affect what they are all 
talking about.
    And, Mr. Zycher, you are exactly right. This isn't a 
crisis. It is a crisis by a certain few who are loud and bored 
activists, but when we have as many things going on in this 
country--an invasion at the border, we have crime, we have so 
many things that are threatening our society--to divert the 
issue on that is lunacy.
    I am running out of time, but do any of you want to comment 
on any of that? Mr. Cunningham?
    Mr. Cunningham. I do think that the system of proxy voting 
has a lot of deficiencies, and the shareholder proposal rule 
has been expanded far too greatly to entertain all of these 
major topics of debate, and the corporate boardroom, the 
corporate meeting room really isn't the right forum, so I 
commend your efforts to try to return to business through the 
shareholder proposal process. And the indexing industry is a 
wonderful industry, but it has a problem. It owns the stock, 
which is great, but maybe it shouldn't vote the stock. Maybe 
that is the solution. We wouldn't need the proxy advisors 
either.
    Mr. Norman. Thank you, sir. We are out of time. I 
appreciate your testimony.
    Chairman McHenry. The gentleman yields back. The gentleman 
from Connecticut, Mr. Himes, is now recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    Mr. Chairman, before I begin my questions, I would like to 
submit the following statements into the record: the Interfaith 
Center on Corporate Responsibility; Out Leadership and 
affiliated businesses; Ceres; the U.S. Impact Investing 
Alliance; US SIF; Americans for Financial Reform; the 
Shareholder Rights Group; and Green America.
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Himes. Thank you, Mr. Chairman. Mr. Chairman, what are 
we doing here? We have had bank failures--with Silicon Valley 
Bank, the government had to step in. I am hearing so much about 
the proper role of government. The government had to step in, 
just as it did when I was a freshman in this institution, to 
rescue the banking sector. We have had the bank failures. We 
are working in great bipartisan fashion on cryptocurrency, on 
regulation there, stablecoins, FTX. We don't want that to 
happen again.
    The SEC is very active. I understand your side doesn't like 
that. My side may like it more, but we have so much to talk 
about, and here we are devoting a week to telling private 
corporations that they are mad for exercising the rights that 
they have in a free market. It is mind-blowing to me.
    Now, look, I am a Democrat, or actually, I am an analytical 
human being. So when I see the fact that the 7 hottest days in 
recent history were in the last week, that feels like a crisis 
to me. Now, my colleague, Mr. Norman, doesn't feel that way. I 
am wondering about our witnesses here. I will get more 
particular here, but if the witnesses could do a show of hands 
quickly, how many of you don't accept the scientific consensus 
that anthropogenic carbon burning is causing an alteration for 
the worst in our climate? Anybody not accept that? If you don't 
accept that, raise your hand.
    [Hand raised.]
    Mr. Himes. Okay. We have one witness who denies the 
scientific consensus on climate change. The rest of our 
witnesses, the other four are not raising their hands. I can't 
breathe in the State of Connecticut because of fires in Quebec, 
and Florida is going to be underwater in a generation. This is 
a crisis, and you know what we do in a crisis? We mobilize as a 
government. I took some economics courses, so I can tell you 
that there is a free market--Mr. American Enterprise Institute, 
I will come back to you--reason to intervene here, which is 
that we are not pricing in the externalities of the burning of 
carbon, and the free market will not solve this crisis that 
four out of five of you acknowledge is real and serious.
    I am also on the House Intelligence Committee, and we have 
a real diversity problem within that committee. These are 
magnificent organizations. The CIA does great work. It is still 
too much what it was a generation ago--pale, male, and Yale--
and they are working really hard to change that, and if they 
don't change that, they are not going to be the powerful 
organization that they need to be. What are we doing here? The 
State of Texas is losing money because they forbade bond 
underwriters that are, ``woke''--whatever that means--from 
participating in municipal auctions for bonds in the State of 
Texas. The State of Texas is losing millions of dollars because 
of this anti-woke crusade.
    The last point I want to make is that I respect those on 
the right who say that we should have free markets. We should, 
but isn't the whole point of the free market that corporations 
get to make their own decisions? And yes, it is a combination 
of the board and the shareholders, but they get to make their 
own decisions, and if they make bad decisions, consumers will 
punish them.
    So if you believe in economics--and, Mr. Zycher, I have a 
lot of respect for the American Enterprise Institute and I go 
to your conferences from time to time, and I think you are a 
principled voice for more right-wing philosophy. Where am I 
wrong about saying that Congress has no role, the State of 
Texas has no role in formally or informally telling players in 
free markets that they shouldn't be woke? Is that a free market 
thing for the government at the State of Texas level or at the 
Federal level to be saying, we are angry about your wokeness? 
Is that consistent with free market principles?
    Mr. Zycher. That is not the premise. The premise is whether 
or not a regulatory agency should be promulgating rules that 
force firms and funds to make decisions or to delegate 
decision-making in ways that are not consistent with the 
fiduciary interests of their shareholders and fund 
participants. The issue is not whether Congress or the State of 
Texas should tell people how to spend their money. Of course, 
that is true.
    Mr. Himes. That is the larger issue. One party here is 
running an entire Presidential campaign premised on the 
notion--talk to Disney--that the government should bludgeon 
corporations into their philosophical framework. I am having a 
little trouble with this conversation, sir, because you were 
the one person who raised your hand saying you didn't believe 
in anthropogenic climate change.
    Mr. Zycher. No, that is not what I said, Congressman. That 
is not what I said. That is not what I stated, not what I 
disagreed with.
    Chairman McHenry. The gentleman's time has expired. I now 
recognize myself for 5 minutes.
    I don't think that this hearing is about climate change. 
There is a lot being done dealing with climate change in our 
country, as I think we all know. And the idea of mobilizing 
government under crisis--our government consists of three 
branches of government, so it can't be mobilized just in the 
branch that you happen to control at the time. I think this 
hearing is more about laws and the following of laws and the 
enforcement of such laws. And if the laws are to be changed, it 
needs to be done by legislation, by lawmakers who represent the 
people; that's how our republic works.
    According to the Investment Advisers Act, dating way back 
almost 100 years, the primary responsibility of a fiduciary is 
to run the plan solely in the interests of the beneficiaries, 
for the exclusive purpose of providing benefits. ERISA law must 
act in good faith with the best interests of the shareholders 
in mind and must disclose any potential conflicts of interest. 
We know of some very large investment companies that have 
actually written letters saying, you are asking the SEC to 
renege on our fiduciary responsibilities. That is what the case 
is here. What is next, investing in foods that are better for 
people? That wouldn't be a bad idea, but to force individuals 
to do so--and that is what we are talking about here. We are 
talking about investment choice versus being forced quite 
unlawfully, I believe, by the SEC.
    I will go further to state that we also shouldn't be forced 
into European standards. I have a bill that requires a study on 
the Corporate Sustainability Due Diligence Directive (CS3D), 
which is an imposition on United States companies to follow EU 
standards that some of you may be familiar with, which is a 
really bad idea, because if such a thing would have passed 60 
years ago, our economy arguably would be about 35 to 40 percent 
smaller than it is today because of our innovation, because 
that is what leads the way in this country, not the force of 
the heavy-handed government, because government, I think we all 
agree on both sides of the aisle, usually gets it wrong.
    Mr. Copland, I want to ask you this, just referring back to 
my bill. I recently asked Treasury Secretary Yellen about the 
directors of CS3D. She agreed that Treasury had significant 
concerns. Do you have similar concerns with such EU directives 
being placed on American businesses?
    Mr. Copland. Absolutely. Do you want me to elaborate?
    Chairman McHenry. Please, for a couple of moments.
    Mr. Copland. We do not want our international system to be 
this, ``we attack you, you attack us,'' sort of system. This is 
what we got out of in the 1930s when it came to the trade 
system when you had retaliatory tariffs going back and forth 
which really shut down world trade and exacerbated the 
Depression. We don't want that with regulatory oversight 
either. What they are suggesting is that by 2028, you could 
have American parent companies with European subsidiaries have 
to do all these sorts of disclosures based on their regime, 
even though our regulators may differ from that, and this can 
go both ways. And I think Members of Congress and the 
Administration may want to raise that----
    Chairman McHenry. Getting our sovereignty over for the 
state of our economy, absolutely, I agree with you. Thank you.
    The SEC climate disclosure rule, Scope 3--I hear all about 
it from manufacturers, from farmers to supermarkets. With such 
a mandate as this, Mr. Zycher, do you think this provision is 
very costly to business as well? Does the SEC have authority 
here?
    Mr. Zycher. I don't believe the SEC has the authority to 
promulgate any part of this rule. The SEC, under Gary Gensler, 
is obviously trying to become part of the climate crusade and 
expand its authority and its budget, and I don't believe the 
rule is consistent with the major questions doctrine recently 
decided by the Supreme Court. And in a policy sense, it is a 
terrible rule in terms of its economic effects.
    Chairman McHenry. Okay. Thank you.
    Mr. Allen, if this precedent were set by the SEC, it they 
enacted such a rule for all political agendas pushed by any SEC 
Commissioner, how would American businesses handle that?
    Mr. Allen. I think that is an appropriate----
    Mr. Zycher. To whom are you directing this?
    Chairman McHenry. Actions taken? I'm sorry. It was for Mr. 
Allen. My time has expired, unfortunately. We can follow up in 
writing afterwards.
    Mr. Allen. I would be happy to follow up.
    Chairman McHenry. Great.
    The gentleman from Wisconsin, Mr. Fitzgerald, is now 
recognized for 5 minutes.
    Mr. Fitzgerald. Thank you, Mr. Chairman. I was part of a 
conversation with a CFO this winter, and the topic of ESG came 
up. And you could tell there was almost a resilience building 
already by some of the major financial institutions to simply 
make a move that was proactive, and in this case, it was on a 
website, to just basically put up a statement about ESG and how 
they were concerned about the environment. And the conversation 
then involved him saying it is just something we are all going 
to have to do to get the SEC off our back, so why not comply 
right now? He didn't take it seriously, and you could see that 
it was part of this corporate pressure that has continued to 
emerge.
    I think, without being redundant of some of the questions 
that were asked earlier, Mr. Copland, can you discuss, first of 
all, the harms to State and local funding that could come from 
ESG mandates, like the potential one from the Municipal 
Securities Rulemaking Boared (MSRB)? Ultimately, that is where 
I see kind of the crossroad is when you start forcing 
compliance with this voluntary kind of half-look at the entire 
issue that is going on right now.
    Mr. Copland. Yes. Here, you have a body that is sort of a 
subsidiary of the SEC, sort of quasi-independent, wanting to 
push these sorts of requirements on, and this is very heavy-
handed. You are basically telling municipalities all around the 
country that they have to buy into this ESG thing, or they are 
going to lose access to capital, and you are effectively 
strong-arming from the top what municipalities can do. And it 
also is probably just going to raise the cost of capital for 
those municipalities in general, and, therefore, that is going 
to affect both local property taxes and local services, et 
cetera. So, it is something we have to be really, really 
careful about, to not be heavy-handed. That is not really what 
that body is for.
    Mr. Fitzgerald. Yes. And I think, just to kind of further 
that discussion, the other part of this is, eventually 
shareholders are going to kind of see through it, right?
    Mr. Zycher, you talked a little bit about this, obviously, 
the overreaching kind of discussion about how much can a 
boardroom and a group of shareholders kind of continue to 
swallow on this front until they say enough is enough because 
they are seeing the impact on their investment and their 
shares.
    Mr. Zycher. There are two problems. One, ESG has never been 
defined very carefully. It has a multitude of goals, which 
inevitably conflict, and the question is, what are the 
tradeoffs among them? To the extent that the business sector 
either chooses to or is forced to incorporate ESG or 
sustainability--if you want to call it that--criteria into its 
business and management decisions, the conflicts become 
greater. The ability and the goal of maximizing returns becomes 
ever more diluted. Capital costs rise, capital productivity 
falls, and with it, labor productivity and wages. The 
implications for the economy are not salutary, which is a 
reality that the empirical literature demonstrates, I think, 
pretty convincingly.
    Mr. Fitzgerald. And there is probably a short fuse on 
compliance with some of these items that will ultimately be set 
in motion, and then what you will see is a series of penalties 
when somebody doesn't comply, and that is my biggest concern. 
We are trying to prevent, once again, the heavy hand of 
government kind of stepping in and inserting themselves into 
something that is the basis for this entire committee, which is 
to govern financial institutions and related services.
    Mr. Zycher. The government has stepped in through SEC 
regulations. The question is, how do we undo that damage? That 
is a job for Congress.
    Mr. Fitzgerald. Thank you very much. I yield back.
    Chairman McHenry. The gentleman yields back.
    The gentleman from Florida, Mr. Donalds, is now recognized 
for 5 minutes.
    Mr. Donalds. Thank you, Mr. Chairman. And thank you, 
witnesses. Attorney General, it's good to see you again.
    This is a great hearing actually, and I know that some of 
our colleagues on the other side don't really want to focus on 
this sector, or what is happening here in our capital markets. 
And I honestly believe the reason why they either, A, don't 
want to focus on it, or, B, say it is a waste of time, is 
because it helps them achieve a lot of the political and social 
ends that they want to see without actually having to come here 
and vote. This works a lot better when you have small pockets 
of activist shareholders bringing board proposals ad nauseam 
and they kind of overwhelm the C-suite, if you will, to 
accomplish these things through the corporate sector that you 
could not get through the legislative process, so I see why 
they didn't want to focus on it.
    I know a comment was made about belief in anthropologic 
global warming. It used to be called climate change or whatever 
you want to say it is. No, I actually don't agree with that 
statement. I don't think that the science is settled. And I 
think it is interesting that in 2023, people talk about settled 
science, and they are also talking about physics, and the laws 
of gravity, and other things that are now tried and true over 
many, many decades. But no, the science is not settled on that, 
but at the end of the day, what we are discussing is the real 
implications, the real-world fiscal implications of ESG policy 
on our capital markets.
    If you look back to returns for 2022, BlackRock's own ESG 
screened S&P 500 exchange-traded fund (ETF) was down 20 percent 
in 2022. It lost 20 percent of its money. And by the way, if 
you look at the fees for that fund, the fees are much higher 
than a baseline ETF, just taking the S&P 500 as a basket of 
securities and delivering it to somebody with an IRA, or if it 
ever got batched into any matrix of a 401(k) that might be out 
there, even one that might be available to pensioners in the 
State of Minnesota. That broad-based S&P energy sector ETF was 
up 50 percent last year--50 percent.
    Now, the reason why it is easy for me to talk about this is 
because I actually was a fiduciary. I was an investment 
advisor. I did the job. I would never invest my clients in ESG 
funds because they are more expensive, and the returns are not 
there. The returns have not been there. And I think the issue 
that we are going to maybe potentially begin to run into is 
that, because you have this chilling effect on the movement of 
capital into the ESG firms, then by the sheer force of capital 
chasing them versus chasing other companies, that either, A, do 
not comply or, B, do not conform to the ESG matrix by their 
dearth of capital. By default, their returns year-over-year as 
a company is going to actually wither over time. That kind of 
chilling effect is not what the free market was ever created to 
do. That chilling effect is something completely different, 
which is an anathema to the free market.
    Mr. Allen, I know proxy advising has been talked about a 
lot, and frankly, the voting procedures going on with these 
shareholder proposals. What would you think a good remedy for 
Congress would be to take a look at this and try to remedy this 
situation?
    Mr. Allen. There are several things that Congress could do. 
Certainly, I think addressing Rule 14a-8, and removing some of 
these social issue proposals from corporate proxy ballots, and 
not requiring companies to have to put these out to a vote of 
their shareholders, certainly that would help quickly on 
matters that relate to ordinary business or that are 
economically significant for a company.
    As I mentioned in my written testimony, I think there 
should be SEC oversight of proxy advisors. I think the SEC's 
proposal in 2019 struck the right balance and then called for a 
draft review process. Public companies can review the accuracy 
and the completeness of the reports before their investors are 
voting on them because part of the problem is that there are a 
number of smaller asset managers who don't put the resources 
into proxy voting and essentially vote blindly or in lockstep 
with the proxy advisors. Unfortunately, it dilutes the voice of 
the other investors who are being more thoughtful, including 
the voice of retail investors who own shares directly in 
companies.
    Mr. Donalds. No, I totally agree. And I think when it comes 
to the question of materiality, at the end of the day, what is 
material is what matters to the financial operations of the 
company, because the investment is into the company itself, not 
into the environment writ large, and not into the social system 
of the United States, or of the world, for that matter; it is 
the going concern of the company. And with that, I yield back.
    Chairman McHenry. The gentleman's time has expired. The 
gentleman yields back. The gentlewoman from California, Mrs. 
Kim, is now recognized for 5 minutes.
    Mrs. Kim. I want to thank the witnesses for being here. And 
I am the last person to ask questions, so hopefully, you will 
take a breath. But I represent a district in Southern 
California which is prone to wildfires because of bad land 
management practices from Sacramento, and we have droughts and 
the impact of climate change. And I share the concerns about 
climate change and welcome the opportunities to work together 
without raising the cost for American firms and retirees, and 
punishing small businesses with onerous climate disclosure 
requirements. Nevertheless, the issue at hand here is that the 
existing SEC rules, like 14a-8, and SEC Chair Gensler's 
decision to roll back the 2020 proxy advisory reforms, has 
politicized boardrooms and directed firms to devote more time 
and resources on costly non-material proposals.
    Mr. Copland, according to NASDAQ, in Fiscal Year 2022, 
nearly 4 times more capital was raised in private offerings 
than in public markets. In your written testimony, you 
mentioned that we have seen the number of companies listed on 
the U.S. public exchanges decline more than 50 percent since 
the mid-1980s. To what do you attribute that decline? Can you 
give us some examples?
    Mr. Copland. Yes. I think it is a mix of factors. One is, 
this body has acted in ways that increased the cost of being 
public through the Sarbanes-Oxley Act in 2003. Another is that 
we had this more-onerous sort of oversight for being a public 
company, which is a bit different today for the reasons that 
Larry Cunningham talked about in his opening statement. The 
landscape has shifted.
    And nowadays, you are going to be called to task by these 
proxy advisory firms that didn't even exist back in the mid-
1980s, or they were just beginning in the back in the mid-
1980s. And they certainly didn't exist for the kind of power 
they had, let alone these big asset management fund families 
like BlackRock, State Street, or Vanguard. They existed, but 
they didn't have nearly the market share and clout they have 
now.
    You are going to have to answer to all these sorts of 
events, so it is a cost of doing business or being public. And 
what we are doing with a lot more private owners within public 
owners is we are creating a two-tiered system of ownership so 
that some people, the Americans who aren't wealthy, who aren't 
accredited investors, have access to all the same sort of 
market returns as others.
    Mrs. Kim. Over 5 decades, we have transitioned our 
retirement system from defined benefit to defined contribution 
plans like 401(k), and in 2019, private sector-defined 
contribution. They had 85.5 million active participants. In 
your view, how could the slowdown in initial public offering 
(IPO) activity and costly non-material shareholder proposals 
impact the returns on retirement savings for Americans?
    Mr. Copland. It unambiguously hurts it, particularly 
because a lot of these defined contribution plans aren't going 
to have access to private capital sources depending on whom 
your employer is. The move towards defined contributions is a 
great move. You don't want to be relying on your employer for 
your retirement because if your employer goes belly up, you are 
in trouble, right? So this is a good thing in general, but, 
yes, not having as many companies in the public markets is a 
problem.
    Mrs. Kim. I want to throw out one question to you, Mr. 
Cunningham. I want shareholders to be engaged in corporate 
governance. It is part of our democratic process. However, SEC 
Rule 14a-8 sets a very low bar for shareholders to submit 
proposals for inclusion in a company's proxy statement. Do you 
believe that we run the risk that rogue actors, like the 
Chinese Communist Party (CCP), could game the shareholder 
proposal process to put our firms at a competitive disadvantage 
in global markets? If so, how can we prevent this from 
happening?
    Mr. Cunningham. Yes. I think there is a great risk when the 
SEC relaxes all of its filters and permits any proposal to be 
submitted, especially the social proposals where the judgment 
of the SEC staff alone will determine whether a proposal needs 
to be submitted or not and is without any nexus to the 
corporation or its shareholders. The risks are endless of the 
sort you referred to about competitive disadvantages and just 
misallocation of corporate resources, so I think restoring that 
constraint should be a high priority.
    Mrs. Kim. Thank you so much. With that, I yield back the 
balance of my time.
    Chairman McHenry. The gentlelady yields back. I would like 
to thank our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 1:00 p.m., the hearing was adjourned.]
    
    
    
    
    
    
    
    
    
   
   
   
   
   
   
  

                            A P P E N D I X







                             July 12, 2023
                             

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