Upcoming Midterms Carry Implications For Corporate ESG Efforts

Election Day is rapidly approaching, and control of both the US House of Representatives and the Senate is on the line. The Democrats have a razor-thin majority that could quickly shift as a result of the midterms. On November 8, all 435 House seats and 35 of the 100 Senate seats are on ballots across the country. In addition, at the state level, 36 of the 50 states will elect governors.

The midterm elections are taking place during a spirited national debate about the appropriate role of environmental, social and governance (ESG) considerations in corporate strategy. Some Republicans have indicated a desire to review actions by companies that have been vocal in supporting ESG issues, including those companies that are expending resources on voluntary environmental or social improvements, such as internal workforce assessments. And, some Republican House members have already vowed to pursue legislation against ESG investing as an effort to push corporations and the financial sector away from pro-climate rhetoric and encourage them to reembrace fossil fuels. For example, a group of congressional Republicans introduced a bill earlier this month challenging a Department of Labor proposed rule that would allow retirement plan fiduciaries to consider ESG factors. Should the midterm elections shift the balance of power in Congress to the right, members of Congress could push forward an agenda challenging ESG efforts. If Republicans were to take control of either chamber, they would set the schedule for the House or Senate floor and could prioritize legislation challenging ESG-related investments. In addition, the majority party wields the gavel in congressional committees, which gives them subpoena power and the ability to investigate priorities. A Republican majority could investigate ESG issues as part of a broader effort to review the state of the economy and corporations that are perceived to be ESG-focused.

At the state level, some Republican attorneys general have taken increasingly aggressive action to advance initiatives challenging ESG efforts as well, and this trend will accelerate with the election of additional Republican attorneys general across the country. For example, US state attorneys general have sent various letters to financial institutions alleging that they have prioritized climate interests over maximizing the return on profits for investors. Similarly, a group of state attorneys general announced in October 2022 an investigation into a group of banks' "alleged deceptive trade practices" related to their involvement in the Net-Zero Banking Alliance. It is expected that at least some Republican-led states will continue to explore legal challenges to companies' support or pursuit of ESG causes, such as the transition to a lower-carbon energy sector or reproductive rights benefits. If the midterms result in a larger number of Republican governors or state attorneys general, similar actions at the state level are likely to accelerate.

Surging inflation may also impact perspectives on ESG-related policies across the aisle, such as renewable energy policies. For example, the cost of energy may be contributing to a softening in some Democrats' policies opposing conventional energy sources. According to the Consumer Price Index, energy costs have seen the most significant price increases, which impacts American households in all parts of the country and across the political spectrum. This demonstrates that ESG critiques may not always be clearly divided along party lines.

Regardless of the outcome of the midterm elections, it is expected that President Biden will continue to prioritize issues such as climate change and environmental justice. Interest by investors in environmental and social shareholder proposals also remains high, as the number of ESG-related resolutions, covering issues ranging from climate change and environmental justice to the impact of plastics and to board and internal workforce diversity, increased from 2021 to 2022.

Ahead of Election Day, considering a potential change in Congress, companies should ensure adequate management and legal assessment of any ESG initiatives, as well as board reporting where appropriate. The WilmerHale team is currently advising on these issues and related governance considerations. We will continue to closely monitor this as Election Day draws closer. Please contact the WilmerHale ESG team to learn more.

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