As the Securities and Exchange Commission works on rules for mandatory environmental, social and governance disclosures, Republican lawmakers are ramping up attacks on corporations that publicly embrace such issues.
The GOP opposition to more corporate ESG reporting doesn’t have much chance of success in a Democratic Congress, but some experts say their efforts underscore the high stakes in the battle for regulations and offer a preview of Republicans’ long game ahead of next year’s midterm elections.
Sen. Marco Rubio, R-Fla., announced a bill that would empower major shareholders to sue corporations and their executives if business strategies deviate from the fiduciary duty to maximize returns for investors.
The draft legislation, dubbed the “Mind Your Own Business Act” by Rubio, would require large public companies to give shareholders with significant holdings “certain privileges” to challenge management in court when business decisions deviate from those purely in shareholders’ best interest, the lawmaker said in a statement.
Rubio’s bill would target business moves that respond to state laws on social issues, such as the Texas abortion ban; boycott certain groups of people or industries; or rely on nonfinancial reasoning. It would increase executives’ personal liability to shareholders for breaches of fiduciary duty, and company executives would be unable to justify their actions with “common defenses used to defend exercises of business judgment,” such as maintaining the firm’s public image.
The bill would amend the Securities Exchange Act of 1934 to create private rights of actions for breaches of fiduciary duties for companies that have more than $20 billion in outstanding shares in public investors’ hands, said Sean Donahue, a partner at Washington law firm Goodwin Procter. The change is unusual because fiduciary duties are typically dealt with by state law, something that the bill acknowledges, and go beyond the purview of the landmark law’s focus on disclosures.
“It’s not really a federal concept. It’s not something the Exchange Act deals with,” Donahue said in an interview. “Here, the Exchange Act would be amended to essentially create private rights of actions for breaches of fiduciary duties in this specific context laid out in the bill.”
Debate over corporate goals
Rubio’s bill touches on the “huge debate” under traditional corporate law theory about whether a corporation’s sole goal needs to be focused on shareholder value and whether companies should take into consideration factors outside of shareholder maximization of value, Donahue said.
An increasing number of CEOs are embracing so-called stakeholder capitalism, in which the needs of workers, the environment and communities are factored into business decisions alongside the interests of investors. The executives are often responding to pressure from activist shareholders focused on ESG issues, whose calls for sustainability and equality frequently align with policy goals of the Democratic Party.
The SEC is drafting new reporting rules on climate change, board diversity and human capital, with some anticipating that the agency could have proposed rules on climate risk disclosures by the end of the year.
Rubio’s bill is “another stake in the ground” in the debate over “to what extent can corporations, or money managers who manage other people’s money, take into account non-pecuniary factors,” Donahue said.
The legislation underscores the Republicans’ critiques that ESG issues and related disclosures are not material to companies’ financial performance. Earlier this month, Senate Banking ranking member Patrick J. Toomey, R-Pa., expressed his opposition to the SEC’s work during a hearing with SEC Chairman Gary Gensler.
“It’s not the SEC’s role nor expertise, as an independent financial regulator with zero democratic accountability, to address these political and social issues,” Toomey said during his Sept. 14 remarks.
Retail and institutional investors — including BlackRock Inc., the world’s largest asset manager — have joined shareholder advocates’ push for ESG inclusion in recent years.
Rachel Curley, who serves as a democracy advocate for Public Citizen, said Rubio’s bill is a sign that Republicans are worried about losing support from corporations.
“Rubio and other Republicans are trying to twist this ESG idea into some sort of left-leaning political agenda, when in fact it’s coming from investors, and more mainstream corporations are understanding that they have to think about these factors over the long term,” she said in an interview.
“It does strike me that Republicans are trying to use every tool they can to strike fear in individual companies because they are losing on the issues themselves,” she said. “I wouldn’t be surprised if they’re trying to spook some companies by suggesting they could face lawsuits from their shareholders.”
Although Rubio’s legislation is unlikely to go anywhere in Congress for now, it indicates the urge for lawmakers and the federal government to strengthen ESG disclosures now, especially if Republicans win more congressional seats in the 2022 midterm elections, Curley said.
“This just adds to the reasons why the SEC should move forward with those rules as quickly as they can,” she continued. “The sooner the SEC can put forward these standard guidelines … the more that this reduces this type of threat of this type of legislation.”
Legislation like Rubio’s and GOP lawmakers’ rhetoric also demonstrate how “the road to final rules requiring ESG disclosures will be a long and difficult one,” regardless of whether it is at the direction of the SEC or Congress, according to Abigail Bortnick, Jennifer Guest and Matthew Wissa, attorneys from law firm King & Spalding.
“Even without such rules, the evidence suggests that investors are increasingly moving away from issuers who do not publish this information or make ESG-related issues part of their governing mandate,” they said in written commentary.
“As a result, it is increasingly likely that issuers will begin to disclose such information, either because they need to do so to raise new capital or because they have determined that the information is now material to investors,” they wrote. “Without standardized definitions or disclosure obligations clearly outlining what information investors can expect to receive, however, it is unclear how effective such disclosures will be.”