Republicans to probe ‘woke capitalism’ of climate-focused investing after midterms

Less than a week before the midterm elections, Republican lawmakers on Capitol Hill are already gearing up to investigate what they see as “woke capitalism,” a reference to Wall Street firms that treat climate change as an economic risk.

Polls suggest the GOP will retake the House, and Republicans there are preparing to grill the chief executives of big financial firms as well as Gary Gensler, the Democratic chairman of the Securities and Exchange Commission, about their efforts to curb climate change. In the Senate, where polls show a toss-up battle for control of the chamber, key senators are pushing legislation to punish businesses that prioritize environmental, social and governance causes - known as ESG - rather than pure profits.

The moves are sure to escalate the battle over ESG investing and have a further chilling effect on Wall Street, where some CEOs are scrambling to emphasize that their firms are still investing in fossil fuels.

Rep. Garland “Andy” Barr (R-Ky.) said in an interview that ESG principles “will be one of the major focuses of oversight of a Republican majority” on the House Financial Services Committee, which oversees the nation’s banking, insurance and real estate sectors.

“My view is that ESG investing is a cancer within our capital markets,” Barr said. “It is a fraud on American investors.”

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The SEC “is a target of our oversight because of this 534-page monstrosity of a climate disclosure regulation,” he added, referring to a proposed rule that would require all publicly traded companies to disclose their greenhouse gas emissions and the risks they face from climate change.

Not everyone is convinced that the Wall Street firms face a real threat from a Republican takeover of Congress. Some see the GOP moves as political theater intended to satisfy the party’s base and fuel the nation’s ongoing culture wars.

The GOP is engaged in “a lot of political hay making,” said Ivan Frishberg, chief sustainability officer at Amalgamated Bank, which does not do business with fossil fuel companies. “But I don’t think this is changing what asset managers or banks are doing in terms of their approach to either their stewardship of assets in a changing climate, or participation in the climate initiatives that they’re a part of.”

Yet supporters of sustainable investing are bracing for intense scrutiny if Democrats fare badly in the midterms, leading to high-profile hearings and grilling of administration officials.

Rep. Frank D. Lucas (R-Okla.) said he would prefer to seek the testimony of Gensler and other Biden administration officials before hauling in the chief executives of big financial firms such as BlackRock, the world’s largest asset manager. Lucas said he would recommend this approach to Rep. Patrick T. McHenry (R-N.C.), who would become chair of the Financial Services Committee if the chamber changes hands.

And Rep. Blaine Luetkemeyer (R-Mo.) said he hopes to call in the heads of the three big investment advisers - BlackRock, Vanguard and State Street - that have used their economic power to curb climate change and advance other causes that are popular among liberals.

McHenry was not immediately available for an interview. The SEC did not respond to a request for comment.

‘Drifting toward wokeism’

If Republicans take the House in the midterms but Democrats keep the Senate, the chief executives of big financial firms could face climate whiplash. Conservative House lawmakers could criticize the firms for their “ESG political bias,” as former vice president Mike Pence recently described sustainable investing, while on the other side of the Capitol, liberal senators could bash the firms for not doing enough to reduce the greenhouse gas emissions that cause climate change.

“We’ve become the loud noise in their right ear after all the screaming in their left ear,” Sen. Kevin Cramer (R-N.D.) said of Wall Street firms.

In a statement, Senate Banking Committee Chair Sherrod Brown (D-Ohio) said he will continue to hold the CEOs of big banks accountable for how they serve their customers and treat their employees, and will bring them to Capitol Hill to answer for themselves.

“We know when Wall Street neglects communities of color and ignores long-term risks like climate change, it’s workers, small-time investors, and consumers who pay the price,” Brown said.

An official in the banking industry, who spoke on the condition of anonymity because they were not authorized to comment publicly, said it’s ironic that Republicans are trying to tell businesses not to embrace climate-conscious investing, even though the GOP typically extols the virtues of the free market.

“Historically, progressives were more comfortable pushing the private sector to support their initiatives, while many conservatives thought the private sector should be free to make the decisions they wanted to make,” the official said. “That has definitely flipped in the last few years. And I think it’s because some conservatives felt they were losing the battle and these companies were drifting toward wokeism.”

Fossil fuel companies have aggressively lobbied to water down the SEC’s climate disclosure rule, putting pressure on Republicans to stand up for the interests of an industry they have championed.

“Banks and investors should not use ESG as a premise to just discriminate categorically against an entire sector,” said Aaron Padilla, vice president of corporate policy at the American Petroleum Institute, a powerful trade group representing the oil and gas industry.

Cramer said he sees no inconsistency between championing free-market capitalism and scrutinizing sustainable investing. He added that conservatives have often sought to take a collaborative - not combative - approach to discussing sustainable investing with banking industry executives.

After he introduced a bill in spring of 2021 to bar banks from discriminating against the fossil fuel industry, Cramer said he had pleasant phone calls with five bank CEOs: Jamie Dimon of JPMorgan Chase, Jane Fraser of Citigroup, Brian Moynihan of Bank of America, Charlie Scharf of Wells Fargo and David Solomon of Goldman Sachs. A few months later, Solomon flew to North Dakota to participate in a town hall with the senator.

Sen. Dan Sullivan (R-Alaska), who has introduced separate legislation to push back on climate risk considerations at BlackRock, Vanguard and State Street — which manage more than $20 trillion in combined assets — has also discussed the bill with industry executives, his spokesman said. “I fully expect those conversations to continue going into next year,” Sullivan said in an emailed statement.

Sen. Tom Cotton (R-Ark.) has accused BlackRock and other Wall Street firms of “acting like a climate cartel” and contributing to high gas prices. But there is no evidence that sustainable investing has affected gas prices, which have gone up for a variety of reasons, including tightening global oil markets and Russia’s invasion of Ukraine.

Larry Fink, the chief executive of BlackRock, has defended his firm’s push to hold companies accountable for environmental and social progress. In his annual letter to corporate America in January, he argued that focusing on ESG principles does not conflict with making money.

“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” Fink wrote in the letter, adding, “Capitalism has the power to shape society and act as a powerful catalyst for change. But businesses can’t do this alone, and they cannot be the climate police.”

At the same time, BlackRock has pushed back on allegations from conservative state officials that the firm is discriminating against fossil fuels. In Texas, for example, a new law bars the state’s retirement and investment funds from doing business with companies that the state comptroller says “boycott” the oil and gas sector.

“We DO NOT boycott the energy industry,” BlackRock says on its website in response. “Quite the opposite: BlackRock’s clients are some of the largest investors in the energy industry. In the U.S. alone, we have invested $170 billion on behalf of our clients in American energy companies, including pipelines and power generation facilities.”

Dimon has also defended JPMorgan’s continued investment in fossil fuels, even after the firm announced in 2020 that it would stop lending to new coal mines or coal-fired power plants.

At a House Oversight Committee hearing in September, Rep. Rashida Tlaib (D-Mich.) pressed Dimon on whether he would commit to stop financing new oil, gas and coal projects with massive carbon footprints that threaten the world’s climate goals.

“Absolutely not, and that would be the road to hell for America,” Dimon shot back.

Contrary to the views of most Republicans, Democrats and climate activists argue that fossil fuel investments are becoming increasingly risky as the world transitions toward cleaner forms of energy. The International Energy Agency predicted last week that demand for coal, gas and oil will peak in the near future, despite the energy crisis sparked by Russia’s war in Ukraine.

Liberals and activists also point to the mounting economic toll that global warming is causing through stronger storms, rising seas and raging wildfires. The United States was battered by 20 weather and climate disasters last year that cost at least $1 billion each, according to the National Oceanic and Atmospheric Administration.

In California, massive wildfires have caused huge losses for insurance companies, prompting many insurers to pull back from fire-prone parts of the state. And in Florida, Hurricane Ian may have been the costliest storm in the state’s history, with insured losses projected to reach $67 billion, according to the modeling firm RMS.

“You have an insurance crisis that’s going on in Florida and California that’s directly tied to climate,” Frishberg of Amalgamated Bank said. “To deny climate risk in the financial context at this point is essentially to be a climate denier.

Jon Hale, head of sustainability research at the financial services firm Morningstar, said businesses in Europe and other countries are already recognizing the risks that climate change could pose to their investments, making the issue virtually inescapable for U.S.-based firms.

Private sector scrutiny of climate risks, Hale said, “is not something that the American political right is really going to be able to stop.”