[Senate Hearing 116-24]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 116-24

 
THE APPLICATION OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PRINCIPLES IN 
  INVESTING AND THE ROLE OF ASSET MANAGERS, PROXY ADVISORS, AND OTHER 
                             INTERMEDIARIES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

    EXAMINING THE EVOLUTION OF ESG CONSIDERATIONS BY INSTITUTIONAL 
    INVESTORS AND HOW INVESTORS ENGAGE WITH COMPANIES ON ESG ISSUES

                               __________

                             APRIL 2, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
                                
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                Available at: https: //www.govinfo.gov /
                
                
                
                          ______

             U.S. GOVERNMENT PUBLISHING OFFICE 
 36-539 PDF          WASHINGTON : 2019
                
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                      Joe Carapiet, Chief Counsel

                  Jen Deci, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, APRIL 2, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    26

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    26

                               WITNESSES

Phil Gramm, Former U.S. Senator..................................     4
    Prepared statement...........................................    27
    Responses to written questions of:
        Senator Cortez Masto.....................................    42
James R. Copland, Senior Fellow and Director, Legal Policy, 
  Manhattan Institute for Policy Research........................     7
    Prepared statement...........................................    29
    Responses to written questions of:
        Senator Cortez Masto.....................................    42
        Senator Sinema...........................................    46
John Streur, President and CEO, Calvert Research and Management..     8
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Warren...........................................    49
        Senator Cortez Masto.....................................    52

              Additional Material Supplied for the Record

Letter submitted by Council of Institutional Investors...........    55
Letters submitted by the National Association of Manufacturers...    63
Letter submitted by Society for Corporate Governance.............    72
Revised and Extended Remarks at the Greenwich Roundtable Panel 
  Discussion on ESG: Path to Prosperity or Philanthropic 
  Confusion by Barbara Novick, Vice Chairman, BlackRock..........    76
``BlackRock Analysis Helps Define Climate-Change Risk'', 
  Financial Times submitted by Senator Sherrod Brown.............    86
Statement submitted by Jana Morgan, Director of Campaigns and 
  Advocacy, International Corporate Accountability Roundtable....    95
Letter submitted by Public Citizen...............................   156

                                 (iii)


THE APPLICATION OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PRINCIPLES IN 
  INVESTING AND THE ROLE OF ASSET MANAGERS, PROXY ADVISORS, AND OTHER 
                             INTERMEDIARIES

                              ----------                              


                         TUESDAY, APRIL 2, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today's hearing will focus on the role of asset managers, 
proxy advisors, and retail investors in engaging with companies 
on environmental, social, and governance issues.
    Last year, Chairman Clayton expressed concerns that the 
``voices of long-term retail investors may be underrepresented 
or selectively represented in corporate governance.''
    Regardless of the tools that retail investors choose for 
investing their hard-earned money, it is critical that they 
have a voice in investment decisions that are being made.
    Whether it is a company's use of a proxy advisory firm or 
an asset manager's investment decision-making policy, the 
retail investor should have a clear understanding of the 
decisions that are being made which ultimately represent their 
shares.
    Last year, John Bogle, the creator of the index fund, wrote 
an op-ed in the Wall Street Journal about how successful the 
index fund has been for investors, noting that if historical 
trends continue, a handful of institutional investors will 1 
day hold voting control of virtually every large U.S. 
corporation.
    Even at existing levels, as consumers continue to use index 
funds, there has been an evolution in the concentration of 
control now held by a small group of asset managers voting a 
huge number of shares.
    Today index funds hold 17.2 percent of all U.S. shares and 
are the largest shareholder in 40 percent of all U.S. 
companies.
    With the exception of socially responsible funds, most 
funds are not targeted at specific environmental or social 
impact objectives, and many investors in these funds do not 
expect asset managers to engage companies on social and 
environmental issues on their behalf.
    However, since the 2014 proxy season, institutional 
shareholders support for inclusion of environmental and social 
proposals has increased from 19 to 29 percent while retail 
shareholder support has increased marginally to only 16 
percent.
    In the 2018 proxy season, ESG proposals were the largest 
category of shareholder proposals on proxy ballots with 15 
percent of proposals climate-related and 14 percent related to 
political contributions.
    It is important to understand how institutional investors 
are voting the shares of the money they manage to make sure 
that retail investors' interests are being reflected in these 
voting decisions.
    Today I look forward to hearing from our witnesses on the 
following questions: How are the retail investors being engaged 
within the proxy voting process and in setting the policies 
used by the asset managers of the passive funds with which they 
invest? Are these shares being voted to drive productivity in 
our economy and increase investors' return on their hard-earned 
investments, or are intermediaries using other people's money 
unbeknownst to them in order to advance environmental, social, 
and other political policies? What financial and other criteria 
are used in identifying social issues for engagement and 
measuring engagement success for end investors?
    I look forward to hearing the views of all of our witnesses 
on these issues, and, again, I thank them for coming here and 
their willingness to appear today.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Chairman Crapo. Welcome to our 
witnesses.
    I hope today's hearing will allow the Committee to better 
understand the growth of environmental, social, and 
governance--ESG--investing principles.
    Corporations have become beholden to quarterly earnings 
reports. One survey of financial executives from public 
companies found that 78 percent would sacrifice economic value 
of their own company just to meet financial reporting targets, 
telling us something, of course, about--well, about their own 
compensation perhaps.
    That is no way to grow our economy.
    Families do not think in terms of 3-month earning quarters. 
They think in terms of school years, 30-year mortgages, and 
years left to save for retirement. The more corporations think 
about the long-term sustainability of their businesses, the 
better off that workers and shareholders and managers and 
customers will be.
    Corporations spent more than $800 billion on stock buybacks 
last year. That money does not end up in the pockets of the 
company's workers. It goes right in the pockets of the CEOs and 
other corporate managers making that decision.
    Last year, for the first time in a decade, corporations 
spent more on their own stock than on investing in long-term 
capital expenditures and worker investments.
    I will say that again. Corporations spent more on their own 
stock than on investing in long-term capital expenditures and 
worker investments.
    We know when companies ignore long-term risks, workers, 
small-time investors, and consumers all pay the price.
    Look at Wells Fargo, in the news a lot lately. The company 
exploited its workers with unsustainable expectations to boost 
its stock value, while the board lavished CEOs with pay raise 
after pay raise. And consumers still pay the price.
    It is not just consumers. It is bad for the company. Wells 
Fargo has faced scandal after scandal, fines and enforcement 
actions, and the worst stock performance among the biggest 
banks. Just last week, for the second time in 2\1/2\ years, the 
CEO stepped down under the cloud of the scandals.
    Study after study tells us that investors who pay attention 
to how companies affect workers and communities and the 
environment do better over time.
    But it is not always easy to figure out which companies are 
thinking long term and which companies are only thinking about 
the next round of stock buybacks. We need to make that critical 
information available to the public.
    Most of the SEC's disclosure requirements were adopted 40 
years ago, when more than 80 percent of S&P 500 companies' 
assets were fixed, like buildings and factories. Today the 
numbers are flipped. More than 80 percent of S&P 500 assets are 
intangible--brand names, patents, and investments to enhance 
worker skills and effectiveness.
    To address that evolution, the SEC Investor Advisory 
Committee last Thursday recommended to the Commission that 
companies include new human capital management disclosures in 
their public filings.
    Adding human capital disclosure is just a start. Investors 
know there are many environmental, social, or political risks 
that could reduce long-term value, but companies are not 
providing that information.
    So the SEC should act. Enhancing and standardizing these 
disclosure requirements will bring the SEC up to date with 
other rules around the world.
    But disclosure is just one step. It is time that companies 
realize that holding executives and directors accountable, 
about respecting workers and the dignity of work, about 
planning for long-term risks instead of short-term payouts for 
CEOs is actually good for business.
    Instead, corporations spend their time lobbying against 
important tools that allow shareholders to hold corporate 
boards and management accountable.
    Corporate special interests want to limit investors' 
freedom to manage and run their funds. They want to silence the 
voices of Main Street investors by making it harder for 
shareholders to petition companies to allow all shareholders to 
vote on issues significant to the company.
    Never mind that corporations never want Government to step 
in to protect servicemembers from banks that repossess their 
cars or protect families from getting trapped in a downward 
spiral of debt with a payday lender--subjects that should be 
topics of hearings rather than this.
    But now all of a sudden, these rich CEOs want Government to 
step in to protect them from ordinary investors and ordinary 
Americans who are trying to make their voices heard on climate 
change, on protecting Americans from gun violence, on treating 
workers with respect. So much for limited Government.
    Just a sidelight, Mr. Chairman. The legislature in Columbus 
is about to pass legislation that would allow anyone over 19 to 
carry a concealed weapon without a permit and with no training. 
It also eliminates the requirement that, if stopped, a suspect 
has to notify the police officer that that suspect is carrying 
a gun. Take away all those protections, and sometimes 
stockholders speak up, and we have to protect the pampered CEO 
from those stockholders, apparently.
    It should not take a crisis to focus executives and 
directors on the essentials of long-term planning. But too 
often short-term thinking takes over; workers, shareholders, 
and customers suffer. Just ask Wells Fargo.
    I look forward to hearing from the witnesses.
    Chairman Crapo. Thank you, Senator Brown.
    Today's witnesses are the Honorable Phil Gramm, a former 
United States Senator from Texas and former Chairman of this 
Committee. Welcome, Senator Gramm.
    Also, Mr. James Copland, senior fellow and director of 
legal policy at the Manhattan Institute.
    And Mr. John Streur, president and chief executive officer 
at Calvert Research and Management and Eaton Vance Company.
    Again, thank you all for being here today. Your written 
testimony has been entered into the record, and we encourage 
you each to try to stick with your 5 minutes. Watch the clock 
there, please. And, Senator Gramm, you may proceed.

          STATEMENT OF PHIL GRAMM, FORMER U.S. SENATOR

    Mr. Gramm. Well, Mr. Chairman, first--let me see. Maybe I 
better turn on my mic. First, thank you for inviting me. And, 
Senator Brown, I am very proud to be here. I spent 18 years on 
this Committee, the best part of it when I served as Chairman, 
and so I am glad to be back here.
    I came back today, I accepted your invitation because I 
believe this is a very important subject. I believe that how 
corporate governance is structured and who money works for will 
have a profound impact on our future prosperity and freedom. I 
respect the opinion and the good intentions of those who would 
collectivize corporate America's structure, but I believe such 
policies would hurt the very people they seek to help. And let 
me explain why.
    The Enlightenment, which was centered in the 1700s, 
liberated the mind, the soul, and property by empowering people 
to think their own thoughts, worship their own gods, and 
benefit from the fruits of their own labor and thrift. As labor 
and capital came to serve their owner, not the crown, the 
guild, the church, or the village, medieval economies awakened 
from a thousand years of stagnation. The Parliament in England 
stripped away the leaching influence of royal charters and 
initiated reforms that ultimately allowed businesses to 
incorporate by simply meeting preset capital requirements. 
Parliament further established in law the principle that 
business would be governed by the laws it passed, in a process 
of open deliberation, not by the corrosive influences and 
rampant cronyism that were pervasive in the medieval 
marketplace.
    The Enlightenment recognized that the crown, guild, church, 
and village had become rent seekers, leaching away the rewards 
for work, thrift, and innovation and in the process reducing 
productive effort and progress. The Enlightenment principle 
that labor and capital were privately owned property, not 
communal assets subject to involuntary sharing, unleashed an 
explosion of knowledge and production, creating a never before 
equaled human flourishing that continues to this day.
    Extraordinarily, today in America, the crown jewel and 
greatest beneficiary of the Enlightenment, political movements 
are afoot that seek to overturn the individual rights created 
in the Enlightenment and return to a medieval world of subjects 
and subjugation. Today we hear proposals to force businesses to 
swear medieval fealty to stakeholders--the modern equivalent of 
crown, guild, church, and village--the general public, the 
workforce, the community, the environment, societal factors. 
These stakeholders would not have to stake any of their toil or 
treasure, but as they did in the Dark Ages, they would claim 
communal rights to share the fruits that flow from the sweat of 
the worker's brow, the saver's thrift, and the investor's 
venture.
    Whereas the Enlightenment was based on the principle that 
people owned the fruits of their labor and thrift, America now 
faces a host of proposals to force the sharing of economic 
rewards that take us back to the medieval concept of communal 
property where the powerful few could extort part of the fruits 
of your labor and capital using the logic that if you own a 
business, you did not build it.
    Thankfully, many of these proposals to overturn the 
Enlightenment's concepts and benefits of economic freedom would 
at least employ its democratic process by seeking to change the 
law. This is the latest struggle in the battle regarding the 
survival and success of economic freedom and prosperity, and it 
will be played out in elections over the next decade. But an 
even greater threat to the Enlightenment's economic foundation 
today comes from the battle now being waged in stockholder 
meetings and corporate board rooms across America. Today 
political activists are pressuring corporations to adopt 
political, social, and environmental policies that would 
subvert labor and capital in ways that have been rejected by 
State legislatures, by Congress, and by the courts.
    Past reforms by Congress, the SEC, and the courts, designed 
to enhance shareholder rights, have unintentionally empowered 
special interest groups to subvert corporate governance, 
forcing corporations to deal with political and social problems 
they were never designed or empowered to deal with. The 
explosion of index funds, whose managers vote shares they do 
not own, has dramatically increased the danger posed by 
political activists not just to American corporate governance 
but to our prosperity and freedom as well.
    As the Chairman pointed out, today index funds control 17.2 
percent of all U.S. shares and are the largest shareholder in 
40 percent of all U.S. companies. Their future growth seems 
guaranteed by the tremendous price advantage gained by simply 
buying a slice of various equity indexes rather than incurring 
the cost of analyzing each individual investment. But that 
efficiency in buying a slice of the index is not free. An index 
fund's profitability is not significantly affected by the 
performance of any given company in the index since their 
primary competitors sell the same indices. Therefore, index 
funds and their proxy advisors have neither the knowledge nor 
the aligned interest to make informed judgments on business-
specific questions that arise in stockholder meetings of 
companies in which they control an ever-increasing share of 
stockholder votes.
    When index funds vote their investor's shares on broad 
social and political issues, the problem is not just lack of 
aligned interest and knowledge; the problem is that index funds 
have a glaring conflict of interest. On those high-profile 
issues, the profitability of the scale-driven index fund 
business will be affected largely by how the public perceives 
the vote the fund cast and how that vote affects the marketing 
of the index fund. The index funds' financial interest, 
therefore, can and often will be in direct conflict with the 
investor's interest.
    As the Chairman pointed out, before his death Jack Bogle, 
founder of Vanguard, urged legislation to explicitly impose a 
fiduciary duty on funds ``to vote solely in the interest of the 
fund's stockholder.'' Anybody voting anybody else's shares or 
advising on how to vote those shares should be bound by strict 
fiduciary responsibility. But even enhanced fiduciary 
responsibility will not solve the inherent conflict of interest 
that index funds face in voting investor shares on high-profile 
social and political issues that have a potential impact on the 
marketability of the very funds that are making the vote or 
casting the vote. On those issues maybe it is time for the SEC 
to require that index funds poll their investors and vote their 
shares only as specifically directed. We cannot allow the 
economic interest of index funds to effectively convert 
``private purpose,'' for-profit C corporations into ``public 
benefit,'' not-for-profit B corporations which the investors in 
the general index funds did not invest in.
    History teaches us that if we want to be prosperous and 
free, within the rule of law, we must let private interest 
create wealth and reap the rewards of its creation. Only after 
wealth has been created should we debate the cost and benefits 
of taxing and redistributing it.
    Chairman Crapo. Thank you, Senator Gramm.
    Senator Brown. Mr. Chairman, I ask that the other two 
witnesses, if they need to take an extra 6 minutes, double 
their time, that they are able to.
    Chairman Crapo. We will do that, but we like to ask 
everybody to try to stay to your schedule if you can.
    Mr. Copland.

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

    Mr. Copland. Chairman Crapo, Ranking Member Brown, Members 
of the Committee, thank you for the invitation to testify 
today. This has been a longstanding and significant focus of my 
research, and what we are talking about today is a bit 
different from what the Ranking Member was talking about. He 
was talking about the voices of Main Street investors, but when 
we look at the market today, 70 percent of all the outstanding 
shares of publicly traded corporations in the United States are 
held by intermediaries, institutional investors, and that 
remaining 30 percent that still holds stocks directly, only 29 
percent of them vote their shares in these proxy ballots.
    The rise of institutional investing is not surprising. 
Institutional investors allow the ordinary person, the Main 
Street investor, to outsource decisions to knowledgeable 
professionals and to diversify holdings even if they have 
limited assets. And, similarly, it is not surprising that 
common stock ownership remains the principal form of ownership 
of large, complex, profit-making business organizations today. 
By raising capital with equity rather than debt, entrepreneurs 
can finance their ventures without placing any obligation to 
pay funders an immediate or regular cash-flow. So I fully 
concur with Senator Gramm that our unparalleled economic 
success is closely linked to precisely these ownership 
structures.
    But the central question before the Committee today 
involves the intersection of institutional investing and 
shareholder corporations. Individuals who entrust their assets 
to corporate managers and individuals who entrust their assets 
to institutional investors both have some difficulty overseeing 
the entities that they give their funds. In each case, we see 
what economists call ``agency costs.''
    The Federal Government has long played a role in overseeing 
both investment companies and stock exchanges. But 
institutional investors that dominate voting today have 
significant agency costs themselves. Institutional investors 
are monitoring corporate boards and managers, but who is 
monitoring the monitors?
    The rules and regulations of the Securities and Exchange 
Commission had been enabling special interests to pursue social 
and policy goals. Under current SEC rules, any shareholder in a 
publicly traded corporation that has held at least $2,000 in 
stock for at least a year may place a proposal on the company's 
proxy ballot. In 2016 and 2017, a majority of shareholder 
proposals sponsored at Fortune 250 companies involved social or 
policy issues largely unrelated to share value, executive 
compensation, or traditional board governance concerns.
    In February of this year, jeans maker Levi Strauss filed 
the paperwork to become a publicly traded corporation. Less 
than 1 month later, the People for the Ethical Treatment of 
Animals announced it was acquiring the minimum requisite $2,000 
in stock in Levi's in order to propose shareholder resolutions 
involving the manufacturer's use of leather.
    Proxy advisory firms, another intermediary, can serve to 
amplify this special interest advocacy. As I summarized in a 
2018 report that I coauthored with Stanford's David Larcker and 
Brian Tayan, a substantial body of empirical evidence shows 
that proxy advisory firms' recommendations influence 
institutional investors and corporate managers alike. And at 
least some proxy advisory advice may not be in the average 
shareholder's interests.
    With trillions of dollars of assets under management, large 
mutual fund families are less susceptible to capture than proxy 
advisors. But at least some large diversified mutual funds like 
BlackRock have also been moving to support some social and 
environmental causes in discussions with corporate managers. 
That is partly due to public pressure campaigns, and it is 
partly due to the fact that portfolio managers tend not to 
involve themselves heavily in shareholder voting, and instead 
large institutional investors staff in-house corporate 
governance teams.
    As Senator Gramm alluded to, this is particularly strange 
in the context of index funds, the premise of which is to 
leverage capital market efficiency and minimize active 
management costs, in essence to follow the stock market. But in 
shareholder voting decisions, such fund families are actively 
supporting efforts to modify corporate behavior. There is no 
clear investment-based rationale for this obvious tension and 
strategy.
    In 2015, the Manhattan Institute commissioned an 
econometric study of shareholder activism and firm value. 
Tracie Woidtke, a professor at the University of Tennessee, 
found that ``social-issue shareholder-proposal activism appears 
to be negatively related to firm value.''
    In conclusion, abetted by SEC rules and procedures, 
institutional investors have gained power in the boardroom. By 
coopting proxy advisory firms, and, to some degree, 
institutional investors, activists have pursued their agendas 
at other shareholders' expense. At least some of this social 
activism appears to be depressing share value.
    Thank you for your time and consideration.
    Chairman Crapo. Thank you very much.
    Mr. Streur.

 STATEMENT OF JOHN STREUR, PRESIDENT AND CEO, CALVERT RESEARCH 
                         AND MANAGEMENT

    Mr. Streur. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, I really appreciate your invitation 
to testify before you today. Thank you. My name is John Streur. 
I am president and CEO of Calvert Research and Management. We 
are a global investment firm. We invest in all developed and 
emerging markets, equity, and debt. As noted, we are part of 
Eaton Vance.
    Our primary focus at Calvert is to generate competitive 
investment returns for our clients, and we incorporate 
information about how company managements are dealing with 
environmental, social, and governance risks into our investment 
decisions. We do this because, increasingly, these issues 
matter to corporate profits.
    Today companies and investors throughout the world are 
working to better understand exactly how to further the 
tremendous progress that corporations, competition, and 
capitalism create, as noted by former Senator Gramm, by 
conducting deeper analysis of environmental and social impacts 
and of corporate governance systems worldwide. All of us are 
interested in driving long-term shareowner value, improving the 
performance of American companies through a better 
understanding of these issues.
    In recent years, interest in corporate exposure to issues 
such as energy efficiency, water conservation, workplace 
diversity, and human rights has intensified. A heightened 
awareness of these issues among consumers and investors alike 
has pushed ESG investing well into the mainstream. In 2018, in 
the United States alone, more than $12 trillion was invested in 
strategies that consider ESG criteria. Most of these were not 
index strategies, by the way. This is a 38-percent increase 
since 2016. The $12 trillion using some form of ESG research 
represents 26 percent of professionally managed assets in the 
United States. It was revealed this morning that, globally, $30 
trillion are invested using some form of ESG research and 
analysis.
    Investors are not the only ones changing their behavior. 
Corporations are really leading this and taking action. Many 
companies in the United States have increased their focus on 
actively managing and reporting on ESG risks in order to remain 
competitive in the global market for products and services and 
capital.
    Eight years ago, only 20 percent of the S&P 500 companies 
provided any type of reporting on relevant ESG risks. Today 90 
percent of companies in the S&P 500 actively and voluntarily 
report on ESG risks factors. So CEOs of companies in the U.S. 
and throughout the world are on the move dealing with these 
issues. So the business case for incorporating ESG 
considerations into the investment process is strong and it is 
well grounded in empirical evidence.
    I want to emphasize the concept of financial materiality. 
We are not interested in all ESG issues. We are interested in 
the ones that matter both to the environment and society and to 
corporate profitability.
    Corporate disclosure standards have also evolved over time 
to reflect changing industry trends as well as regulatory and 
judicial developments. Undoubtedly, there has been substantial 
debate and discussion on these issues, probably amongst Members 
of this Committee. I would like to briefly speak to the issue's 
relevance as it pertains to the benefits of standardization and 
the competitiveness of U.S. capital markets.
    As you know, in the U.S. we are fortunate to have the 
deepest, most liquid, most well-developed capital markets in 
the world. They are also well known for transparency and 
excellent disclosure. Yet when it comes to the issue of 
standardizing disclosures related to ESG risk factors, 
unfortunately the U.S. is beginning to lag behind our foreign 
competitors. This is an issue that will manifest itself in more 
difficulty for American companies to access foreign capital 
going forward.
    Much of the information provided through voluntary 
disclosures is difficult to compare and inconsistent across the 
issuers of securities, resulting in considerable costs and 
resource expenditure for investors. While it is impossible to 
discern the amount of expense incurred by investors attempting 
to deal with ESG data, one estimate suggests that by 2020, $745 
million will be spent annually trying to discern ESG data 
alone. So we suggest an effort to create standards for U.S. 
issuers of securities to use. Our concern is that if we do not 
do it, foreign regulators will, and they will be in a position 
to guide what we have to do here in the U.S.
    The title of this hearing has to do also with proxy 
advisory firms, so I would just like to make a few comments in 
terms of how Calvert uses those firms and introduce a couple of 
additional concepts in addition to this point about financial 
materiality.
    A core part of Calvert's investment approach is structured 
engagement, our use of the well-designed feedback mechanism for 
investors of all types to communicate directly with the 
management of companies. The proxy voting process is part of 
our capitalist system. It is an opportunity for shareowners to 
show their knowledge, give feedback to companies, and attempt 
to guide those corporations. The vast majority, perhaps all 
investors, do this in an effort to enhance profitability and 
drive shareowner returns. All of us have the same financial 
incentives here.
    At Calvert, we do use proxy advisors. There are two large 
ones in the U.S.: ISS and Glass Lewis. I think it is important 
for everybody to understand the role they play.
    On the one hand, they are an essential part of the 
infrastructure. The process of voting proxies is transaction 
intensive and it is laborious. Calvert voted 47,000 issues last 
year alone across 4,760 annual general meetings. The actual 
process of that in the U.S. is cumbersome, so these proxy 
advisory firms serve an essential purpose of helping with the 
voting, the casting of votes, and the recordkeeping.
    Additionally, the number of issues that we have to deal 
with is vast. These companies provide expert analysis of our 
proxy voting guidelines and make recommendations to us, but 
just recommendations. At the end of the day, mutual funds and 
institutional investors are fiduciaries, and it is our 
responsibility to make sure these votes are cast in a way that 
is consistent with our objectives. Our objectives are to drive 
long-term shareowner value, make no doubt about that.
    So the proxy advisory firms fulfill an essential purpose. 
If there is something to be done here, one might consider a 
requirement for mutual fund companies and institutional 
investors to fully disclose their proxy voting guidelines. Many 
of us do on our websites so all investors can understand our 
point of view and where we stand on these critical issues.
    I would also point out that proxy voting histories are a 
matter of public record. Investors who care can access that 
information, and they can understand how their mutual fund or 
asset manager has voted.
    I would like to again thank the Committee for allowing me 
the opportunity to share my perspectives on these important 
topics. My sincere hope is that this forum provides an 
opportunity for constructive dialogue on how to balance the 
ongoing competitiveness of U.S. capital markets, investment 
management firms, and corporations with the need to ensure that 
our capitalist system achieves the most sustainable future 
possible.
    Thank you.
    Chairman Crapo. Thank you, Mr. Streur, and I will start 
with you in my questions.
    I understand your point that, if I understood you right, 
your focus on ESG risk factors is all ultimately to determine 
the most profitable position that a corporation can take. Is 
that correct?
    Mr. Streur. Yes.
    Chairman Crapo. And in terms of your discussion of the use 
of proxy advisors, I take it that you are comfortable that the 
proxy advisors you use are helpful to you in that context. Many 
of us are concerned that, with the concentration of power, of 
voting power, with those who have proxies, political 
considerations rather than profitability considerations will 
start or even have started to rule the day.
    Do you have that concern or do you think that is not an 
issue that we should be worried about?
    Mr. Streur. Thank you, sir. I understand your question. We 
in the capital markets worry about everything, so I would not 
discard your concerns outright. But we are all in this 
investment business extremely competitive, so the market is--we 
participate in the free market system. It has a way of 
governing itself. I do not think you need to worry that any of 
us are going to put political considerations in front of 
profitability or in front of our track records. I do not think 
that concern is well founded at all. I am sorry.
    Chairman Crapo. All right. And can I ask Senator Gramm and 
Mr. Copland to respond to that same issue?
    Mr. Gramm. Well, let me say that my dealings with proxy 
advisors basically have been good. I think they listen. I think 
it is somewhat concerning there are only two firms, and one of 
those firms is very much affiliated with an interest that has a 
political position. But I think the problem is not proxy 
advisors. I think the problem is that whenever you have 
somebody voting somebody else's shares and it is not their 
money, you have a potential problem. It is just like when 
somebody is spending somebody else's money, you have a 
potential problem, even when those are good people.
    And so I think the big, big problem is that we are headed 
like a freight train toward a situation where corporate 
America, the engine of much of our economic progress and mass 
production, is going to be controlled by index funds that do 
not own shares directly in those companies but are voting 
somebody else's shares; and when they are voting those shares, 
on high-profile issues like environmental issues, like social 
issues, like political issues, they clearly are aware, have to 
be aware that the performance of the stock that is affected by 
their vote is not going to affect their ability to sell their 
index because their competitor is selling the same index. But 
how they vote and the publicity it gets is bound to affect 
their marketing. And so you have got a conflict of interest 
building between the interests of the shareholder and the index 
fund, and the index funds are becoming more and more dominant, 
even in small companies.
    And so wherever you are on the political spectrum, this is 
something I think we ought to be concerned about.
    Chairman Crapo. Thank you. And, Mr. Copland, you have got 
my last 50 seconds.
    Mr. Copland. Sure, Mr. Chairman. I agree with everything 
the Senator just said. I want to add a few pieces of 
information to that. The proxy advisors do often run out in 
front of the institutional investors on these issues, and I 
show that in my written testimony. I have written about that. 
They get ahead in terms--they are much more likely than the 
median shareholder to support these social and environmental 
proposals for various reasons. And they do influence voting. 
Fifteen percentage points is what we did in our econometric 
analysis. There are a lot more in that study I did with Larcker 
and Tayan. We have seen politics come into play, express 
partisan politics. I am sure the Ranking Member likes it that 
we see companies get more targeted by labor union pension funds 
when they give more money through their PACs to Republicans. 
But that is a little troubling if they are actually fiduciaries 
there.
    Chairman Crapo. Thank you.
    Senator Brown.
    Senator Brown. I am not sure your assessment of my opinion 
is well founded, but since we know each other so well, feel 
free to make it.
    Mr. Streur, I think we should do more for workers than just 
new disclosures, but if a company describes how it is managing 
its workforce or investing in worker training and skills, what 
does that tell investors about the long-term value and 
sustainability of a company?
    Mr. Streur. Well, today the way companies create well-being 
for their workforce is a big determinant of their return on 
invested capital and their profitability. So investors are 
very, very interested in understanding how companies create 
well-being for a diverse workforce, and it tells us whether or 
not management is expert at creating a workforce that can be 
globally competitive for the long term.
    Senator Brown. So that is not politics. That is good 
business.
    Mr. Streur. Totally good business. That is all we are 
interested in, really.
    Senator Brown. OK. This question is for all three 
witnesses. I will start with Mr. Gramm, and I would like an 
answer as close to yes or no as you can possibly give. Should 
shareholders be able to hold executives and directors of opioid 
manufacturers and distributors accountable for misleading the 
public about how addictive these drugs are?
    Mr. Gramm. I think anybody who misleads the public should 
be held accountable.
    Senator Brown. OK. Mr. Copland.
    Mr. Copland. Assuming, arguendo, that, in fact, there was a 
fraud, then there is and could be accountability, sure.
    Senator Brown. OK.
    Mr. Streur. Absolutely.
    Senator Brown. Should large and small shareholders have a 
right to question a company's policies if they create financial 
or reputational risk for the company? Mr. Gramm.
    Mr. Gramm. Small and large stockholders should always have 
the right to question a company. That is what a corporate 
structure is about.
    Senator Brown. OK. Mr. Copland.
    Mr. Copland. It depends what you mean by ``question,'' and 
that is really what we are talking about, is how do we allocate 
the powers. Should a small shareholder be able to impose 
massive costs on all the other shareholders through processes 
affirmed by the SEC? Probably not.
    Remember that when we are talking about publicly traded 
corporations, every shareholder has the right to exit. So if 
they are really concerned about a company, they can sell their 
shares.
    Senator Brown. Mr. Streur.
    Mr. Streur. Here in America the answer is yes, small and 
large shareowners should have rights to question management and 
make a contribution.
    Senator Brown. Regardless of Mr. Copland's qualifying 
statement?
    Mr. Streur. Yes, regardless of that.
    Senator Brown. OK. Mr. Copland, what do you think about 
that?
    Mr. Copland. I think he is probably wrong. If they were 
forced to internalize their costs, Roberta Romano at Yale Law 
School, for instance, suggested a loser-pays type of mechanism 
where if a shareholder proposal is introduced and is defeated 
by a majority of shareholders, then that sponsoring shareholder 
has to reimburse the cost. That sort of idea might make it more 
tenable. But, otherwise, you have things like what I have 
described where the People for the Ethical Treatment of animals 
buying 2,000 shares of stock and generating many multiples of 
that of cost on the company to try to hijack the proxy process 
to make their political statement.
    Now, the political statement might be right, but that is 
not what the proxy process should be about.
    Senator Brown. Well, you and before, Mr. Streur, since you 
have assumed you know how I think, I guess I will assume with 
your Manhattan affiliation how you think, that that whole 
loser-pays ideas you all find really attractive, I am sure. Mr. 
Streur.
    Mr. Streur. Well, that is a regressive tax concept if we 
are going to talk that small shareowners bear those costs. It 
is not what our free market system is all about. We have 
already regulatory processes in place at the SEC that create a 
set of requirements for what the shareowner can actually get on 
the ballot. Those have been adequate. They continue to be 
adequate. So we have got a good process in place already, and 
the concept of boxing out the little guy is not what our free 
markets are all about. It is not what American capitalism is 
all about. So these costs are theoretical. We have got a system 
in place that deals with those. And we are not interested in 
creating a super class of investors in this country. We are 
interested in equality and supporting the ability for small 
investors to have their voices heard. That is how the system 
has been designed, free market.
    Senator Brown. Let me ask one last question----
    Mr. Gramm. Senator, could I respond to that question as 
well?
    Senator Brown. Sure.
    Mr. Gramm. I think the plain truth is that all over America 
this process is being abused. People are buying a small number 
of token shares to force corporate board meetings to deal with 
issues that have nothing to do with the company, and they are 
using up valuable time, and they often end up being bought off. 
So I think to suggest that there is nothing wrong with the 
system is absurd unless your objective is to see the corporate 
system literally tied up in knots for no productive purpose. 
But its purpose is to create the prosperity that we enjoy.
    Senator Brown. Well, and we have seen no corporate 
misbehavior and nothing else seems to be----
    Mr. Gramm. Well, look, the fact that corporations misbehave 
does not mean----
    Senator Brown. ----the White House regulators do not keep 
them----
    Mr. Gramm. ----the system is not abused.
    Senator Brown. ----hold them responsible and accountable. 
So I tend to come down on the side of the shareholders.
    Mr. Chairman, thank you.
    Chairman Crapo. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    I had a kind of sequence here that I wanted to go through, 
but, Senator Gramm, I think you have hit on something that I 
wanted to explore later on, but I think I am going to go right 
to it. And this would be for all of our participating members 
here today.
    Mr. Copland, in your testimony you noted the great extent 
to which retail investors are able to play a part in the 
shareholder proposal process. In particular, you cited examples 
of which investors who held barely a few dozen shares of stock 
representing less than one ten-thousandth of 1 percent of an 
entire company were able to place proposals on annual 
shareholder ballots. Senator Gramm, you are alluding to a 
similar position. This is due largely in part to an SEC 
regulations that allows any shareholder in a publicly traded 
corporation that has held at least $2,000 in stock for 1 year 
to place a proposal on that company's proxy ballot.
    Is this low threshold a good idea or is this something that 
the SEC needs to revisit? And, Mr. Copland, if your comment is 
within the original----
    Mr. Copland. I have been on the record suggesting that it 
is too low. It has not been revised in 20 years. I have written 
on this publicly. If we are not going to do a loser-pays type 
of mechanism, we at least ought to require an investment 
sufficiently large so that the investor does not have less than 
the actual cost. Just the cost of adding this to the proxy 
ballot alone--and the SEC has done these studies. They are not 
just theoretical costs, like Mr. Streur talked about.
    Now, the big costs are what Senator Gramm was talking 
about. Taking the time of the board of directors and the CEO of 
a large multinational corporation to consider these questions, 
that is the big cost. But the direct costs themselves are less 
than this.
    Is it really squeezing out small investors? I understand 
the argument, but that is not what is going on. What is 
happening, as I say in my written testimony, is that you have 
three individuals and their family members. Who are the 
individual investors who are active in this process? Three 
individuals and their family members sponsored between 25 
percent and 45 percent of all shareholder proposals over the 
last several years. So these corporate gadflies are repeat 
players in this game, and they are doing it over and over and 
over, and they are getting treated like royalty by CEOs.
    Senator Rounds. I think, if I could, and I am going to run 
out of time, but I think your answer is yes.
    Mr. Copland. The answer is absolutely yes.
    Senator Rounds. OK. Mr. Gramm, I am going to finish with 
you, but I want to go to Mr. Streur for just a minute here, and 
I would like your thoughts. You have heard the discussion, and 
I think Mr. Copland makes a good point, that there is something 
involved, but I suspect that you may not agree with him.
    Mr. Streur. Well, I think he does make a good point. There 
are exceptions to the rule. He is referencing a number of 
shareholder proposals that have been filed by just a few 
people. That is not a reason to change a system.
    Senator Rounds. You are suggesting that the SEC rule by 
itself is appropriate at a $2,000 level of investment?
    Mr. Streur. Sure. There are specific requirements in terms 
of how you--you cannot just lob a proposal onto a ballot. There 
is a process that you have to go through with the Commission. 
The company has an opportunity to challenge you through the 
SEC. And only if you meet certain conditions will your proposal 
actually make it onto a ballot. It is important for us to all 
understand.
    Senator Rounds. Thank you. That is what I was curious 
about, that thought process, that there is a process in place 
to sort of weed out some would be your position on it.
    Mr. Streur. There is, but I would not discard the concept 
that there are a few players who file shareowner resolutions 
that we are not interested in. They do not pass the test of 
financial materiality. That does not have anything to do with 
the size of the investor.
    Senator Rounds. Right.
    Mr. Streur. So we can always improve systems, but the 
radical change that is being put forward here is not what we 
need.
    Senator Rounds. Thank you.
    Senator Gramm.
    Mr. Gramm. Well, I think the system is being abused. I 
think that it is logical that either you should require greater 
ownership, but I think an even better way would be to simply 
require that in order to get a vote, you have a certain 
percentage of the stock owners that support your amendment. You 
cannot get a vote in the greatest deliberative body in the 
history of the world, the U.S. Senate, without a second. So why 
should you be able to stand up at a General Motors stockholder 
meeting and demand votes on trivial issues based on $2,000 
worth of General Motors shares? This just makes no sense. And 
what is really happening here is two things: one, the seeking 
of publicity; and the other, the effort to intimidate the 
company--to intimidate the company to support your foundation 
or to intimidate the company to negotiate some settlement with 
you to simply go away. You do not even have a higher threshold 
to offer the amendment the second time. So if I offer an 
amendment and I am the only shareholder who votes for it, the 
next year I am going to offer it again. I mean, clearly this 
does not make any sense, and it ought to be fixed.
    Senator Rounds. Thank you, Senator. My time has expired.
    Mr. Chairman, I would just make a note that this Committee 
has in the past looked at ways in which to literally do a 
number of things that are of social value, and one of them--and 
I think that we should not miss--in S. 2155 this Committee did 
work very hard at protecting our veterans, and particularly 
with--there was a comment made earlier that we did not take 
care of even our veterans, and yet this Committee in S. 2155 
specifically put in language to protect our veterans from 
financial ruin due to health care issues and medical bills. But 
thank you, Mr. Chairman.
    Senator Toomey [presiding]. Thank you, Senator Rounds.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thanks to the 
testifiers.
    Mr. Streur, I have about eight questions for you, so as 
close as you can get to yes or no or a brief answer, that would 
be great. Is ESG mainstream at this point?
    Mr. Streur. Yes.
    Senator Schatz. Do firms that have high scores in ESG 
perform well compared to firms that do not?
    Mr. Streur. High scores on financially material issues, 
yes.
    Senator Schatz. And what priority does Calvert place on 
investment performance?
    Mr. Streur. Top.
    Senator Schatz. And how does ESG investing help you to meet 
your benchmarks?
    Mr. Streur. It helps us better understand how good 
management is.
    Senator Schatz. And so it is fair to say this is consistent 
with your fiduciary responsibility?
    Mr. Streur. Yes.
    Senator Schatz. What information is useful to analysts and 
portfolio managers at Calvert as they make investment 
decisions? And how available is that information across 
companies and industries?
    Mr. Streur. That is not a yes-no answer.
    Senator Schatz. Yes, I understand. You have been quick, so 
I----
    Mr. Streur. So what is important to understand is that the 
things that matter to a company are very specific to the 
business characteristics. So the things that matter to a 
utility company are different from the things that matter to a 
software company. So your question about what matters, well, it 
is very important to understand the specific business that you 
are analyzing, so different things matter.
    Your question about how available is it, it is most 
available on the largest companies, but it is not completely 
available through the regulatory filings in the U.S. at all. So 
there are various initiatives to help companies understand what 
investors are really interested in and help those companies to 
create disclosure standards to provide the information that 
shareowners want.
    Senator Schatz. And as an example, Senator Gramm referred 
to ends that are political in nature, and I had to lean back to 
my staff to confirm that I think what is being talked about is 
climate disclosure, and I would like to ask you whether you 
think companies are doing an adequate job of disclosing 
material climate risk?
    Mr. Streur. It is changing, but we are not close to being 
there yet. And I think that companies themselves understand 
these risks fairly well because we can see companies taking 
action to protect themselves from risks associated with climate 
change. As investors, we want to understand how well those 
managers are doing in terms of allocating shareowner resources 
for this purpose.
    Senator Schatz. Right, and your anchoring what you do in 
materiality I think is a principled and practical way to move 
forward so that we remove the politics from it. I mean, to the 
extent that we talk about material climate risks, it ought to 
be hard-nosed and related to shareholder value. And the 
difficulty--I think there are numerous difficulties here. One 
is just that the Securities and Exchange Commission is not 
accustomed to doing this. The other is that the window for 
consideration as it relates to climate used to be 10, 20 years, 
and they could credibly say this is outside of our window. But 
what has happened is that, whether it is the Quadrennial 
Defense Review or any other Government analysis of climate 
risk, it is now within the window that ought to be under the 
Securities and Exchange Commission disclosure. So I thank you 
for all the work you have done.
    I have a question for Mr. Copland, and I want to flesh out 
the sort of social-political goal thing. After the Enron 
scandal, the number of corporate governance-related shareholder 
proposals exploded. This is the ``G'' in ESG, right? And when 
U.S. companies divested from South African companies during 
apartheid, mostly as a result of shareholder resolutions 
calling for divestment, they applied pressure and made change. 
And I am assuming you think those were appropriate uses of 
shareholder activism. I mean, I am trying to figure out where 
the line is or whether it actually--your judgment ends up being 
made on the basis of what you think is so much a political 
consensus that it is no longer political. In other words, I 
assume that you think it is OK for a publicly traded company 
and shareholders to say, hey, we do not want to be 
discriminating against LGBTQ; we do not want to be investing in 
companies that do, you know, wrongful actions but not illegal 
actions overseas. There is reputational risk there. Apartheid 
is a good example.
    Climate is not ripe politically in your mind, but what is 
the difference in terms of the law?
    Mr. Copland. Well, the difference in terms of the law has 
shifted over the years, and it is really not law. It is really 
SEC rulemaking. But I think what you were getting on at the 
beginning--and I do not agree with all the things you are 
talking about that they should be part of the shareholder 
proposal process. What you were getting on at the beginning I 
think is an important distinction. ESG is this sort of merged 
term, but governance issues are different from environmental 
and social issues.
    Senator Schatz. OK. What about the apartheid example? Do 
you think that is an appropriate use of shareholder activism?
    Mr. Copland. No, I do not. I think it should be excluded 
from the ballot. The SEC used to have a rule that issues of 
general social-political concern were excludable from the 
ballot. This was the rule from the early years through the 
1970s. And then there was litigation that went to the D.C. 
Circuit involving the use of napalm in the Vietnam War, with 
the underlying against Dow, and the D.C. Circuit sent it back 
to the SEC, and the SEC changed the rule. They were not ordered 
to change the rule. They changed their rule, and since then now 
this is the window through which all these social and political 
issues have come into play.
    But, no, I think that is a board of directors decision. 
Those are the fiduciaries who are running the company. I 
totally agree that the boards should be----
    Senator Schatz. You do not think there is----
    Mr. Copland. ----sensitive to the issue.
    Senator Schatz. Hold on. Let me just get one last question 
in. You do not think there is--in the case of apartheid, you do 
not think there is reputational risk that would impact 
profitability?
    Mr. Copland. No, no, no. That is not what I said. 
Absolutely there is reputational risk. The question is who 
decides. Where does the decision lie? Does it lie with the 
shareholders or the directors?
    Senator Schatz. Hold on. The decision, of course, is the 
board of directors. The question is whether an individual 
shareholder has the authority to present something to the board 
of directors for decision making. Now I get that there are 
individual gadflies that are doing what they are doing, but the 
basic question of whether a shareholder is a shareholder is a 
shareholder or does it depend how much wealth you possess? Does 
it depend on the extent to which you are a shareholder? If you 
have $2 million, do you have certain rights that a $2,000 
shareholder does not have? And there is just no evidence that 
we should move in that direction.
    I have exceeded my time. Thank you.
    Senator Toomey. Thank you.
    Senator Tillis.
    Senator Tillis. Senator Gramm, finish the thought you had.
    Mr. Gramm. Well, what would you think if the resolution 
demanded the company not do business in Israel?
    Senator Tillis. I think that pretty much sums that one up. 
Now I have a question----
    Mr. Gramm. The problem is if you start down that----
    Senator Brown. Wait a second. Wait, wait. Senator Gramm, 
wait a minute. Mr. Schatz did not respond because it is not his 
time because Senator Gramm--actually, Mr. Gramm--I will call 
him ``Mr. Gramm''--is not actually Chairman of this Committee 
now. So if you want to yield time, but do not make a point that 
he wins, he loses--he did not speak.
    Senator Toomey. So will Senator Tillis yield time to 
Senator Schatz to respond?
    Senator Tillis. My time?
    Senator Toomey. Yes.
    Senator Tillis. No.
    [Laughter.]
    Senator Toomey. OK. The time is yours.
    Senator Tillis. I could yield your time, but not my time.
    Mr. Gramm. Could I finish the question?
    Senator Tillis. Yes, Senator Gramm.
    Mr. Gramm. The problem is if you start down this road, 
there are all things that we think are bad. I do not know 
anybody that does not think apartheid----
    Senator Tillis. Well, Senator Gramm, that--because I want 
to ask----
    Mr. Gramm. The problem is you get into other things.
    Senator Tillis. That is exactly the point. That is why we 
do sanctions. That is why we exist to take care of those things 
and not necessarily put it on the backs of value creators.
    The question I had for you, my lane back when I was in the 
private sector was in supply chain and supply chain 
optimization, and if you look at FTSE and they rate General 
Motors and Exxon as having pretty solid supply chains and well-
run organizations. An alternative index for FTSE, though, rates 
Tesla higher because of green output. The concern I have 
about--Tesla is awesome, love the car, would like to afford one 
someday. They have got a great car. They have got a very, very 
disturbing supply chain. You see it in the number of products 
they bring to market, how long it takes to fix a car when it 
gets damaged. They have got a lot of fundamental problems as a 
manufacturer that they need to take care of. But the investor 
would look at that and say, well, this is probably a pretty 
good investment, pretty good buy. How do you feel about that, 
rating a company based on output versus their ability to 
sustainably produce that output?
    Mr. Gramm. I think that investors will make good decisions 
if you give them information. I am very much opposed to forcing 
companies to do things as part of some social objective. The 
problem is all of these--the crisis we had in the housing 
industry was a result of trying to force private money to serve 
public purpose. Congress made Freddie and Fannie meet quotas on 
subprime lending. They forced them to destroy the standards for 
making loans. CRA forced banks to make subprime loans. And what 
was the result of all that, making private wealth serve public 
interest? We call it the ``financial crisis.''
    So it is just a bad way. I think you said it well, Senator. 
Congress is supposed to make these decisions. Who licensed 
General Motors to set public policy? Their duty is to build 
good cars and to do it efficiently and to create profits for 
the people who invest in the company and a good place to work 
for the people that work for the company.
    Senator Tillis. By the way, I do not think your point about 
Israel is far off. We know all about BSD----
    Mr. Gramm. No, it is not far off.
    Senator Tillis. ----activist groups out there that are 
trying to advance those sorts of things through the corporate 
board. So I think it is actually a very good point.
    I do have a question about ESG in Europe. You know, Europe 
does not have the thriving capital markets liquidity that we 
enjoy here. Do you think maybe their interest in this approach 
is it drives our performance down? Or is there some other 
motivation that you could see other than that? They are never 
going to rise to our level of execution, so what is their end 
game to actually shift the social responsibility to 
corporations? Mr. Copland.
    Mr. Copland. I think there is definitely a push afoot in 
that. A year ago, in April, I was in Paris talking to some of 
the international bodies there at the invitation of the 
Administration, and France was considering precisely this, a 
move toward a more stakeholder model of capitalism. Your 
colleague on the Committee, Senator Warren, has proposed a bill 
and wrote in the Wall Street Journal going in that direction. I 
think it is precisely the wrong direction for the reasons I 
write about at length, including in my written testimony. But, 
yes, there is an effort afoot on that.
    And I do think that that is distinct, I want to emphasize, 
from what Mr. Streur was talking about, where if we can agree 
on materiality, financial materiality, we are pretty close 
together on that.
    Senator Tillis. My time is up, but, Mr. Streur, I want to 
tell you I appreciated your thoughtful comments and your 
testimony. And I think you are going about this in a reasonable 
way. It is not on or off. I just feel like we are going down a 
path that will really disincentivize innovation and global 
competition, which I am very, very concerned with.
    Thank you, Mr. Chair.
    Senator Toomey. I want to thank all the witnesses. I want 
to start with an observation of my own. It has long seemed to 
me that one of the crown jewels of the greatest free enterprise 
economy in the history of the world has been our capital 
markets, big and broad and liquid, and increasingly in recent 
decades democratized in a way that did not look plausible 
decades ago. Index funds, low-cost even free equity trading for 
retail investors, retirement plans, these have come together to 
create investment opportunities for people of modest means that 
never occurred before.
    What I am worried about is a trend that we are on now most 
recently. Since 1997, the number of public companies has been 
cut in half. One of the real-world consequences to the delays 
of private companies going public is the small investor never 
gets a chance for the huge upside that often comes in high-
growth companies.
    This is, I think, a huge problem. I think the ESG activism 
is contributing to companies choosing to stay private longer 
than they otherwise would, and that is depriving retail 
investors. And I think we have got an obvious need for reform 
in three areas.
    One, I think shareholder proposals, the threshold for 
introducing them are clearly too low because people who have no 
real financial interest in the company are nevertheless able to 
tie up huge amounts of resources on behalf of that company.
    I think proxy advisors, there is a real question of whether 
they are aligned with the interests of investors, and there are 
obvious conflicts of interest. I think we need a new rulemaking 
to deal with that.
    And, finally, institutional investors, mutual funds, and 
pension funds, there needs to be a clear and unequivocal 
explication requirement that they have a duty to maximize the 
return to investors. That is their job. They are fiduciaries.
    So I am urging the SEC to take all three of these steps as 
quickly as they can, and certainly in time for these new rules 
to be in effect for the next proxy season.
    I want to go back to this question about shareholder 
proposals. Mr. Copland, in your testimony you highlighted an 
amazing case where a group that owned 47 shares--not 47,000 
shares--47 shares of McDonald's out of the 765 million shares 
outstanding could nevertheless force a question. This would be 
numerically equivalent to 20 Americans out of the 320 million 
Americans, for 20 Americans to force a national referendum on 
all of us. It seems to me that it is reasonable to require a 
broader interest in an issue before it can be brought. Do you 
have a specific change to the threshold in mind? Do you have a 
specific reform that you would recommend?
    Mr. Copland. I have talked about it before, and, you know, 
the House had some legislation on this. I actually thought that 
the percentage ownership--they did it as more a percentage 
ownership, and there is a percentage in the rule. It is just 
irrelevant because the dollars are so low. They had 1 percent, 
which I think is too high, probably, especially for large cap 
companies. But certainly a material percentage would be one 
mechanism. The other would be a loser-pays type of mechanism.
    Senator Toomey. And just to be clear, if you establish some 
threshold--let us call it 1 percent--that does not mean that 
the only person who would be able to drive an issue would be 
someone who owns that much but, rather, someone who could 
cobble together other investors who shared the interest.
    Mr. Copland. You could aggregate shares, and you do see 
regularly social investing funds, public pension funds, et 
cetera, coming together on some of these issues.
    Senator Toomey. So, Senator Gramm, is it your view that the 
increasing levels of social-issue shareholder activism does, in 
fact, discourage some companies from going public? Does it 
delay that?
    Mr. Gramm. I think there is no question about that. I think 
what is happening is that special interests are trying to force 
American business to implement policies that you are rejecting 
in the U.S. Senate. We have got special interests that are 
trying to force business--banks not to make loans to specific 
kind of businesses. I do not understand why people do not see 
how dangerous that is, because you can start with no loans to 
consumer lenders or no loans to gun dealers, and pretty soon 
you have got a policy where you are cutting off sectors of 
society from getting access to private services. This is a very 
dangerous business. Congress ought to be making those 
decisions.
    Senator Toomey. And if it is true that companies are 
delaying going public out of this very concern, does that not 
have the effect of depriving retail investors, people of modest 
means, the opportunity to invest in companies that could 
generate terrific returns for them?
    Mr. Gramm. It is clear that it is discouraging companies 
from going public. It is clear that these kind of concerns that 
are imposed are like leeches that are leaching away the 
productive capacity of not just capital but labor. And I think 
we have got to be very careful that we do not let special 
interests try to win in the corporate boardroom battles they 
cannot win in Congress, cannot win in the legislatures, cannot 
win in the courts.
    Senator Toomey. Thank you. My time has expired. I think the 
Ranking Member has a quick follow-up question he wanted to ask.
    Senator Brown. Thank you, Senator Toomey.
    I have one follow-up question, Mr. Copland. Talking about 
one of the McDonald's shareholder issues, there was a small 
shareholder that in 2017 had a proposal about McDonald's use of 
antibiotics. The next year, McDonald's announced it would 
reduce its use of antibiotics, citing threats to global health 
and food security. Doesn't that shareholder proposal, even 
though offered by a shareholder with small holdings, doesn't 
that seem like an important issue to the company? And then 
didn't that result in something even though it was a small--it 
was a modest shareholder?
    Mr. Copland. My argument is not at all that companies are 
nonresponsive to shareholder proposals. Quite the contrary. And 
my argument is not that every shareholder proposal is a bad 
idea. Quite the contrary. Some of them are good ideas.
    The question is the process. The process matters because, 
otherwise, you are enabling individuals to just sort of seize 
this process. There is no question that antibiotics at 
McDonald's is not something that they would never have thought 
about if the Benedictine Sisters of Boerne, Texas, had not 
bought 52 shares in McDonald's and introduced that shareholder 
proposal. I will guarantee you the managers at McDonald's and 
the executives and the board is thinking about those sorts of 
issues. The question is whether that small group of nuns should 
be able to make this a boardroom discussion and an annual 
meeting subject on the proxy ballot that the SEC oversees.
    Senator Brown. Mr. Streur, would you comment on that?
    Mr. Streur. Well, I think, by the way, you are right. 
McDonald's and many other food companies have figured out that 
the American consumer does not want to eat food from animals 
that have been doused with antibiotics for lots of reasons. And 
then this concept that the shareholder proposal in and of 
itself forces companies to do something is deeply flawed. The 
shareholder proposal puts it to a vote, the American system. 
The shareholder proposal gets it on the ballot so we can see 
what other shareholders think. Then you get a vote, and you can 
say, ``Hey, this small group in Texas of nuns has an issue. Put 
it on the ballot. Let us see what everybody thinks.'' Wow, 24, 
25, 30, 35, maybe even a majority votes in favor of it. That is 
how the system works. So it is a good----
    Senator Brown. You suggest that even if it does not carry a 
majority of shareholders, but if it has 15 or 20 or 30 or 35 
percent minority vote, it makes the board think a little more 
seriously, particularly in a consumer company, about its 
behavior?
    Mr. Streur. Sure. And, by the way, there was a lot of 
discussion about how index funds vote. Index funds vote mostly 
with management. Predominantly, they just throw the lever and 
vote with management. That has been the history. So when you 
get a 25-percent vote of shareowners knowing how much is held 
by index funds and their habit of just supporting management, 
it is an important feedback mechanism for that board and that 
management. If nobody voted for it, it goes away. You cannot 
come back the next year if nobody voted for your proposal. You 
have got to get a certain percentage to come back on the----
    Senator Brown. If I had sat here through this Committee, 
from what you said about index funds just then, and listened to 
your two colleagues, I would have thought index funds had a 
much more insidious, pernicious influence and almost never 
voted with management. It is interesting you say that.
    Senator Toomey. So this has amounted to a second round 
here, so I am going to ask----
    Senator Brown. Senator Van Hollen has not had a first 
round.
    Senator Toomey. So we usually alternate. I think that is 
the tradition of the Committee. So I would like to pose a 
question to Mr. Copland, and then we will go to Senator Van 
Hollen.
    There is a report that I think you referenced in your 
testimony by Tracie Woidtke--I may be mispronouncing her name--
about public pension fund activism and firm value. And my 
understanding from the executive summary is the conclusion 
includes that ownership by public pension funds engaged in 
social-issue shareholder-proposal activism is negatively 
related to firm value, according to this study. And, 
specifically, then ownership by the New York State Common 
Retirement system is also negatively related to firm value 
during the period in which the fund was actively engaged in 
sponsoring shareholder proposals related to social issues.
    So I guess the question is: From your research, does it 
appear that this kind of activism is actually harmful to 
investor interests?
    Mr. Copland. From the research we have done, the short 
answer is yes, and we commissioned that study precisely because 
we wanted to ask the question when we saw what was going on, 
because these public pension funds are quite different from 
what Mr. Streur--Mr. Streur is absolutely--he is running 
Calvert. He has got to hold onto his assets. If he does not get 
good returns, people are going to leave his fund and go 
somewhere else with their money.
    That is not the case for our public pension funds that 
exist for the retirement of our public employees. These are run 
by boards, but they have got the capital locked in. And in the 
case of something like the New York State Common Retirement 
Fund, the sole fiduciary is a partisan elected official. So you 
have got Tom DiNapoli there who is the State comptroller of New 
York, the sole fiduciary of the fund--had no investment 
background, by the way, when he got that job. And that fund has 
repeatedly introduced social proposals to try to influence 
corporate behavior. And what Tracie Woidtke, Professor Woidtke, 
discovered in her study--and this was building on a methodology 
she had done in her doctoral dissertation--is that this is 
actually negatively related with firm value.
    I also just want to clarify that what Mr. Streur was 
talking about, about, well, you have got to get some support to 
get back on the ballot the next year, that is true. But under 
the SEC rules, you need 3 percent of the vote. So if 97 percent 
of the shareholders vote no but 3 percent vote yes, then the 
shareholder proponent can get the same proposal on the ballot 
the very next year. One thing we have argued is that seems 
really low and probably should be raised.
    Senator Toomey. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman, Ranking 
Member. Thank you for your testimony.
    Senator, I was glad to hear you start out talking about the 
Enlightenment and individual rights, and as I listened to this 
hearing--and I had to step out for a moment--it seems to me 
that you are actually advocating a position that is the 
opposite of allowing people to make their individual choices 
with respect to these decisions. The gentleman, Mr. Streur, 
saying that you are going to try and restrict proxy advisors or 
put rules on proxy advisors----
    Mr. Gramm. I did not mention proxy advisors----
    Senator Van Hollen. No? OK. Well, and institutional 
investors.
    Mr. Gramm. Well, let me say----
    Senator Van Hollen. No, no. I have got my 5 minutes, and I 
am going to ask my question.
    Mr. Gramm. Well, OK.
    Senator Van Hollen. But what it seems to me--because we 
have had a lot of testimony. This hearing has been a lot about 
proxy advisors and institutional investors.
    Mr. Gramm. Not my----
    Senator Van Hollen. Well, then, Senator, you will agree 
with me--right?--that anyone has a right to choose a proxy 
advisor to look into whatever they want, right?
    Mr. Gramm. If it is their money, they are paying for it----
    Senator Van Hollen. Their money. Exactly.
    Mr. Gramm. ----they have a right to do it.
    Senator Van Hollen. Because there are a lot of folks 
around----
    Mr. Gramm. You do not have the right to make them do it, 
no.
    Senator Van Hollen. No, but, Mr. Copland, you agree, right? 
If I want to hire a proxy advisor, that is my right to do it, 
and you know what? If I pick a person who makes the wrong----
    Mr. Copland. Absolutely. I am not arguing for the 
elimination of proxy advisors.
    Senator Van Hollen. OK. But as I listened to the testimony, 
the suggestion is here they are leading everybody astray, and I 
would just ask--because I also represent--you know, T. Rowe 
Price has a big office in Baltimore. You know, they want to 
hire a proxy advisor; they have been pretty happy with their 
proxy advisor. As Mr. Streur said, you know, they take into 
account some of the information. They sift through it. They 
point out in a letter to me that both ISS and Glass Lewis have 
transparent mechanisms in place for issuers to address factual 
errors in their data analysis. And then they go on to say, ``We 
are more concerned, frankly, with the potential''--and this is 
House legislation from last year--``the potential to undermine 
and inappropriately influence the independence of proxy 
advisors.''
    Mr. Streur, if you could just talk about this a little bit, 
because I find, you know, the world has sort of turned here. We 
have had a lot of people--and I do not want to speak again for 
these gentlemen, but we had a lot of testimony, as I heard some 
of the testimony, it was like we do not want, you know, 
individuals to be able to--we want to protect them from 
themselves when it comes to their ability to go out and say, 
``I want this institution to vote my stock in a certain way,'' 
or, ``I want these proxy advisors to provide me information.'' 
Could you talk a little bit about that?
    Mr. Streur. Thank you, Senator Van Hollen. Proxy advisors. 
I first want to point out that many of the examples of proxy 
issues that we have heard today are at the extreme, things that 
do have to do with unusual issues filed by very small 
shareowners. The bulk of the activity is around executive 
compensation, corporate governance, matters that are extremely 
important to the competitiveness of American companies. These 
issues are complex, and we need to be able to compare one 
company's executive compensation program to peer groups and get 
into details in order to properly evaluate resolutions from 
management or from other shareowners. Proxy advisory services 
fulfill an extremely important part of that system in terms of 
aggregating data and information and helping us to understand 
best practices sector by sector, industry by industry.
    So the reality of proxy voting is that the interesting 
issues that we have been talking about today, while they are 
important, are the vast minority of what we actually deal with 
across the thousands of issues that we face every single year. 
So the proxy advisory system, extremely important, useful. At 
the end of the day, the fund manager is a fiduciary. They are 
responsible for the vote. They make the decision. That is our 
case. That is T. Rowe's case. That is everybody's case.
    Senator Van Hollen. Could you also just briefly talk a 
little bit about the link and correlation between investment 
returns and the issue of asking for the ESG standards that you 
and your firm--could you talk about that?
    Mr. Streur. Yeah, thank you. And I think, again, what is 
important to focus in on is this concept of financial 
materiality. And I think this gets to the heart of American 
competitiveness. And a question was asked earlier about what 
are the Europeans up to. The Europeans are attempting to 
strengthen their system, to strengthen their companies to be 
more competitive with Americans, and to attract foreign 
capital. So when we think about ESG information, what we want 
is the information that pertains to the profitability, the 
long-term value of the companies we are analyzing. There is a 
very, very strong linkage there. And regarding this research 
about proxy issues, if you focus in on proxy issues that are 
filed on financially material issues, you get an entirely 
different result. You find that proxy issues associated with 
financial materiality are associated with superior investment 
performance. This is very important for the Committee to 
understand. We want to strengthen the system. We want to make 
American companies competitive in an increasingly competitive 
market. The Chinese are coming. They want foreign capital. We 
have to keep our companies up to date, so the linkage between 
financially material ESG performance, profitability, and stock 
prices is strong. It has been documented by thousands of 
studies. That is what we want. We want better disclosure, 
easier to use, on issues that will help us improve corporate 
America.
    Senator Van Hollen. Thank you.
    Senator Toomey. And I think we are out of time here. I want 
to thank all of our witnesses for being here today and 
providing testimony.
    For Senators who wish to submit questions for the record, 
those questions are due on Tuesday, April 9th. I encourage the 
witnesses, if you receive questions, to please respond 
promptly.
    And with that, this hearing is adjourned.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today's hearing will focus on the role of asset managers, proxy 
advisers, and retail investors in engaging with companies on 
environmental, social, and governance issues.
    Last year, Chairman Clayton expressed concerns that the ``voices of 
long-term retail investors may be underrepresented or selectively 
represented in corporate governance.''
    Regardless of the tools that retail investors choose for investing 
their hard-earned money, it is critical that they have a voice in the 
investment decisions that are being made.
    Whether it is a company's use of a proxy advisory firm or an asset 
manager's investment decision-making policy, the retail investor should 
have a clear understanding of the decisions that are being made which 
ultimately represent their shares.
    Last year, John Bogle, the creator of the index fund, wrote an op-
ed in the WSJ about how successful the index fund has been for 
investors, noting that if historical trends continue, a handful of 
institutional investors will one day hold voting control of virtually 
every large U.S. corporation.
    Even at existing levels, as consumers continue to use index funds, 
there has been an evolution in the concentration of control now held by 
a small group of asset managers voting a huge number of shares.
    Today, index funds hold 17.2 percent of all U.S. shares and are the 
largest shareholder in 40 percent of all U.S. companies.
    With the exception of socially responsible funds, most funds are 
not targeted at specific environmental or social impact objectives, and 
many investors in these funds do not expect asset managers to engage 
companies on social and environmental issues on their behalf.
    However, since the 2014 proxy season, institutional shareholders 
support for inclusion of environmental and social proposals has 
increased from 19 to 29 percent while retail shareholder support has 
increased marginally to only 16 percent.
    In the 2018 proxy season, ESG proposals were the largest category 
of shareholder proposals on proxy ballots with 15 percent of proposals 
climate-related and 14 percent related to political contributions.
    It is important to understand how institutional investors are 
voting the shares of the money they manage to make sure that retail 
investors' interests are being reflected in these voting decisions.
    Today, I look forward to hearing from our witnesses on the 
following questions: How are the retail investors being engaged within 
the proxy voting process and in setting the policies used by the asset 
managers of the passive funds with which they invest? Are these shares 
being voted to drive productivity in our economy and increase 
investors' return on their hard-earned investments, or are 
intermediaries using other people's money unbeknownst to them in order 
to advance environmental, social and other political policies? What 
financial and other criteria are used in identifying social issues for 
engagement and measuring engagement success for end-investors?
    I look forward to hearing the views of our witnesses on these 
issues, and I thank them for their willingness to appear today.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you Chairman Crapo and welcome to our witnesses.
    I hope today's hearing will allow the Committee to better 
understand the growth of environmental, social, and governance, or ESG, 
investing principles.
    Corporations have become beholden to quarterly earnings reports. 
One survey of financial executives from public companies found that 78 
percent would sacrifice economic value of their own company just to 
meet financial reporting targets.
    That's no way to grow our economy.
    Families don't think in terms of 3-month earnings quarters--they 
think in terms of school years, and 30-year mortgages, and years left 
to save for retirement. And the more corporations think about the long-
term sustainability of their businesses, the better off workers, 
shareholders, managers, and customers will be.
    Corporations spent more than $800 billion on stock buybacks last 
year. \1\
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    That money doesn't end up in the pockets of the company's workers--
it goes right in the pockets of the CEOs and other corporate managers 
making the decision.
    Last year, for the first time in a decade, corporations spent more 
on their own stock than on investing in long-term capital expenditures 
and worker investments. \2\
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    We know when companies ignore long-term risks, workers, small-time 
investors, and consumers all pay the price.
    Look at Wells Fargo--the company exploited its workers with 
unsustainable expectations to boost its stock value, while the board 
lavished the CEOs with pay raise after pay raise. And consumers are 
still paying the price.
    But it's not just consumers--it's bad for the company. Wells Fargo 
has faced scandal after scandal, fines and enforcement actions, and the 
worst stock performance among the biggest banks. And just last week, 
for the second time in 2\1/2\ years, the CEO stepped down under the 
cloud of the scandals.
    Study after study tell us that investors who pay attention to how 
companies affect workers and communities and the environment do better 
over time.
    But it's not always easy to figure out which companies are thinking 
long-term, and which companies are only thinking about the next round 
of stock buybacks. We need to make that critical information available 
to the public.
    Most of the SEC's disclosure requirements were adopted almost 40 
years ago, when more than 80 percent of S&P 500 companies' assets were 
fixed, like buildings and factories. Today, the numbers are flipped--
more than 80 percent of S&P 500 assets are intangible--we're talking 
about brand names, patents, and investments to enhance worker skills 
and effectiveness.
    To address that evolution, the SEC Investor Advisory Committee last 
Thursday recommended to the Commission that companies include new human 
capital management disclosures in their public filings.
    Adding human capital disclosure is just a start. Investors know 
there are many environmental, social, or political risks that could 
reduce long-term value, but companies are not providing that 
information.
    So the SEC should act. Enhancing and standardizing these disclosure 
requirements will merely bring the SEC up-to-date with other rules 
around the world.
    But disclosure is only one step. It's time that companies realize 
that holding executives and directors accountable, respecting workers, 
and planning for long-term risks instead of short term payouts for CEOs 
is good for business.
    Instead, corporations have spent their time lobbying against 
important tools that allow shareholders to hold corporate boards and 
management accountable.
    Corporate special interests want to limit investors' freedom to 
manage and run their funds.
    And they want to silence the voices of Main Street investors by 
making it harder for shareholders to petition companies to allow all 
the shareholders to vote on issues significant to the company.
    Never mind that corporations never want Government to step in to 
protect servicemembers from banks that repossess their cars, or protect 
families from getting trapped in a downward spiral of debt with a 
payday lender.
    But now all of a sudden, these rich CEOs want Government to step in 
to protect them from ordinary investors and ordinary Americans who are 
trying to make their voices heard on climate change, on protecting 
Americans from gun violence, on treating workers with respect. So much 
for limited Government.
    It shouldn't take a crisis to focus executives and directors on the 
essentials of long-term planning. But too often short-term thinking 
takes over, and workers, shareholders, and customers suffer.
    Just ask Wells Fargo.
    I look forward to hearing from the witnesses.
    Thank you, Chairman Crapo.
                                 ______
                                 
                    PREPARED STATEMENT OF PHIL GRAMM
                          Former U.S. Senator
                             April 2, 2019
    Chairman Crapo and Ranking Member Brown, it is a privilege to 
testify before the Committee I served on and chaired for 18 years. I 
accepted your invitation because I believe the debate about how 
corporate governance is structured and who money works for will have a 
profound impact on our prosperity and freedom. I respect the opinions 
and good intentions of those who would collectivize America's corporate 
structure, but I believe such policies would hurt the very people they 
seek to help.
    The Enlightenment liberated mind, soul, and property, empowering 
people to think their own thoughts, worship their own gods, and benefit 
from the fruits of their own labor and thrift. As labor and capital 
came to serve their owner, not the crown, the guild, the church, or the 
village, medieval economies began to awaken from a thousand years of 
stagnation. The Parliament in England stripped away the leaching 
influence of royal charters and initiated reforms that ultimately 
allowed businesses to incorporate by simply meeting preset capital 
requirements. Parliament further established in law the principle that 
business would be governed by the laws it passed, in a process of open 
deliberation, not by the corrosive influences and rampant cronyism that 
were pervasive in the medieval marketplace.
    The Enlightenment recognized that the crown, guild, church, and 
village had become rent seekers, leaching away the rewards for work, 
thrift, and innovation and in the process reducing productive effort 
and progress. The Enlightenment principle that labor and capital were 
privately owned property and not communal assets subject to involuntary 
sharing, unleashed an explosion of knowledge and production, creating a 
never before equaled human flourishing that continues to this day.
    Extraordinarily in America, the crown jewel and greatest 
beneficiary of the Enlightenment, political movements are afoot that 
seek to overturn the individual economic rights created in the 
Enlightenment and return to a medieval world of subjects and 
subjugation. Today we hear proposals to force businesses to again swear 
medieval fealty to ``stakeholders''--the modern equivalent of crown, 
guild, church, and village--``the general public . . . the workforce . 
. . the community . . . the environment . . . societal factors.'' These 
stakeholders would not have to ``stake'' any of their toil or treasure, 
but, as they did in the Dark Ages, they would claim communal rights to 
share the fruits that flow from the sweat of the worker's brow, the 
saver's thrift and the investor's venture.
    Whereas the Enlightenment was based on the principle that people 
owned the fruits of their labor and thrift, America now faces a host of 
proposals to force the sharing of economic rewards that take us back to 
the medieval concept of communal property where the powerful few could 
extort part of the fruits of your labor and capital using the logic 
that if you own a business ``you didn't build it.''
    Thankfully, many of these proposals to overturn the Enlightenment's 
concepts and benefits of economic freedom would at least employ its 
democratic process by seeking to change the law. This latest struggle 
for the survival of economic freedom and prosperity will be played out 
in elections during the next decade. But an even greater threat to the 
Enlightenment's economic foundations comes today from the surreptitious 
battle now being waged in stockholder meetings and corporate board 
rooms across the country. Today political activists are pressuring 
corporate America to adopt political, social and environmental policies 
that would subvert labor and capital in ways that have been rejected by 
State Legislatures, the Congress, and the Courts.
    Past reforms by Congress, the SEC and the courts, designed to 
enhance shareholder rights, have unintentionally empowered special 
interest groups to subvert corporate governance, forcing corporations 
to deal with political and social problems they were never designed or 
empowered to deal with. The explosion of index funds, whose managers 
vote shares they do not own, has dramatically increased the danger 
posed by political activists not just to American corporate governance 
but to our prosperity and freedom as well.
    Today index funds hold 17.2 percent of all U.S. shares and are the 
largest shareholder in 40 percent of all U.S. companies. Their future 
growth seems guaranteed by the tremendous price advantage gained by 
simply buying a slice of various equity indices rather than incurring 
the cost of analyzing each investment. But such efficiency is not free. 
An index fund's profitability is not significantly affected by the 
performance of any given company in the index since their primary 
competitors sell the same indices. Therefore index funds and their 
proxy advisers have neither the knowledge nor the aligned interest to 
make informed judgements on business-specific questions that arise in 
the stockholder meetings of the companies in which they control an 
ever-increasing share of stockholder votes.
    When index funds vote their investor's shares on broad social and 
political issues, the problem is not just the lack of aligned interest 
and knowledge, the problem is that index funds have a glaring conflict 
of interest. On those high profile issues, the profitability of the 
scale-driven index fund business will be affected largely by how the 
public perceives the vote the fund cast and how that vote affects the 
marketing of the firm. The index funds financial interest, therefore, 
can and often will conflict with the investor's interest.
    Before his death, the great Jack Bogle, founder of Vanguard, urged 
legislation to explicitly impose a fiduciary duty on funds ``to vote 
solely in the interest of the fund's shareholder.'' Anybody voting 
somebody else's shares or advising on how to vote those shares should 
be bound by strict fiduciary responsibility. But even enhanced 
fiduciary responsibility won't solve the inherent conflict of interest 
that index funds face in voting investor shares on high profile social 
and political issues that have a potential impact on the marketability 
of the fund. On those issues maybe it is time for the SEC to require 
that index funds poll their investors and vote their shares only as 
specifically directed. We cannot allow the economic interest of index 
funds to effectively convert ``private purpose'' C corporations into 
``public benefit'' B corporations which the investors in general index 
funds didn't invest in.
    History teaches us that if we want to be prosperous and free, 
within the Rule of Law, we must let private interest create wealth and 
reap the rewards of its creation. Only after wealth has been created 
should we debate the cost and benefits of taxing and redistributing it.
                                 ______
                                 
                 PREPARED STATEMENT OF JAMES R. COPLAND
   Senior Fellow and Director, Legal Policy, Manhattan Institute for 
                            Policy Research
                             April 2, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
I would like to thank you for the invitation to testify today. My name 
is James R. Copland. Since 2003, I have been a senior fellow with and 
director of legal policy for the Manhattan Institute for Policy 
Research, a public-policy think tank in New York City. Although my 
comments draw upon my research conducted for the Manhattan Institute, 
\1\ my statement before the Committee is solely my own, not my 
employer's.
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     \1\ Some language in this testimony may be substantially similar 
to, or in some places identical, to that in my previous publications 
and earlier testimony before other Government bodies.
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    Today's topic has been a significant focus of my research.
    U.S. capital markets continue to lead the world. But changes in 
those markets potentially imperil that leadership place. These changes 
should prompt careful scrutiny from Congress and regulators at 
administrative agencies including the Securities and Exchange 
Commission. I want to focus my testimony on three central points:

  1.  Shareholder voting today is dominated by institutional investors.

  2.  Many of these institutional investors, and other intermediaries, 
        are subject to capture by interest groups with values 
        misaligned from those of the ordinary diversified investor and 
        in tension with efficient markets and capital formation.

  3.  American corporate law and securities regulation, to date, have 
        not been equipped to address this problem.
Institutional Investors
    Institutional investors--such as mutual funds, index funds, 
pensions, and hedge funds--own 70 percent of the outstanding shares of 
publicly traded corporations in the United States. \2\ The percentage 
of corporate shares held by institutional investors has increased over 
time. \3\ That's not surprising. Institutional investors have much to 
offer the ordinary investor, who can outsource investment decisions to 
knowledgeable professionals and diversify holdings even with limited 
assets.
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     \2\ Broadridge and PricewaterhouseCoopers, ``Proxy Pulse: 2017 
Proxy Season Review'', Sept. 2017, available at https://www.pwc.com/us/
en/services/governance-insights-center/library.html.
     \3\ See Matteo Tonello and Stephan R. Rabimov, ``The 2010 
Institutional Investment Report: Trends in Asset Allocation and 
Portfolio Composition'', The Conference Board Research Report, No. R-
1468-10-RR, 27, 2010, available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1707512.
---------------------------------------------------------------------------
    But this outsourcing of capital also has risks. Ordinary investors 
generally lack the capacity to oversee those to whom they entrust their 
investment resources. The costs of the principal (in this case, the 
investor) monitoring the agent (in this case, the institution managing 
the investor's funds) are called ``agency costs'' in the economic 
literature.
    Federal law attempts to protect ordinary investors who entrust 
others with their capital. Mutual funds serving general investors must 
comply with the Investment Company Act of 1940. Retirement funds, 
except those managed by State and local governments or religious 
institutions, must comply with the Employee Retirement Income Security 
Act of 1974.
The Fink Letter
    Yet the law has little to say about how such institutional 
investors exercise their voting rights as shareholders. \4\ In a winter 
2018 letter to shareholders, BlackRock chief executive officer Laurence 
Fink suggested ``a social purpose'' for corporations benefiting all 
``stakeholders,'' not merely corporate shareholders:
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     \4\ In the late 1980s, the U.S. Department of Labor issued a 
guidance letter instructing retirement benefit funds governed by ERISA 
to vote their shares according to a ``prudent man'' standard. See 
Letter from U.S. Department of Labor to Helmuth Fandl, chairman of 
Retirement Board, Avon Products, Inc. (Feb. 23, 1988); see also 73 FR 
61731 (Oct. 17, 2008). In 2003, the SEC clarified that similar 
fiduciary duties attach to mutual funds and other registered investment 
companies. See 68 FR 6585 (Feb. 7, 2003) (``The duty of care requires 
an adviser with proxy voting authority to monitor corporate events and 
to vote the proxies. To satisfy its duty of loyalty, the adviser must 
cast the proxy votes in a manner consistent with the best interest of 
its client and must not subrogate client interests to its own'' 
(internal citations omitted)).

        Society is demanding that companies, both public and private, 
        serve a social purpose. To prosper over time, every company 
        must not only deliver financial performance, but also show how 
        it makes a positive contribution to society. Companies must 
        benefit all of their stakeholders, including shareholders, 
        employees, customers, and the communities in which they 
---------------------------------------------------------------------------
        operate.

    BlackRock manages more assets than any other institutional investor 
in the world. To some degree, Fink's evoked a truism. But his letter 
nevertheless provoked controversy because it weighed in on one side of 
a debate that has raged on for a century--and, in one reading, embraced 
what has generally been the minority view, at least in terms of legal 
responsibilities. \5\
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     \5\ Shareholder primacy--the notion that corporate managers have a 
near-exclusive fiduciary obligation to shareholders rather than other 
corporate ``stakeholders''--is deeply rooted in American law. It traces 
at least as far back as Dodge v. Ford Motor Company, in which the 
Michigan Supreme Court ruled that Henry Ford had a fiduciary duty to 
manage Ford Motor Company for the benefit of shareholders rather than 
employees or the broader community. 170 N.W. 668. (Mich. 1919).
    In the academic literature, Adoph Berle and Gardiner Means were 
early defenders of the primacy of shareholders' interests in governing 
corporate managers' fiduciary duties. See Adolph A. Berle and Gardiner 
C. Means, ``The Modern Corporation and Private Property'' (1932) (the 
classic exploration of agency costs in the American corporation). 
Shareholder primacy was buttressed by later law and economics articles 
conceiving of the corporate form as a nexus of contracts. See, e.g., 
Armen A. Alchian and Harold Demsetz, ``Production, Information Costs, 
and Economic Organization'', 62 Am. Econ. Rev. 777 (1972); Michael C. 
Jensen and William H. Meckling, ``Theory of the Firm: Managerial 
Behavior, Agency Costs, and Ownership Structure'', 3 J. Fin. Econ. 305 
(1976).
    Notwithstanding the more modern push for ``corporate social 
responsibility,'' cf. Christopher Stone, ``Where the Law Ends'' (1975); 
Ralph Nader, Mark Green, and Joel Seligman, ``Taming the Giant 
Corporation'' (1976); but see David L. Engel, ``An Approach to 
Corporate Social Responsibility'', 32 Stan. L. Rev. 1, 1 (1979) (``Any 
mandatory governance reforms intended to spur more corporate altruism 
are almost sure to have general institutional costs within the 
corporate system itself. . . . But the proponents of `more' corporate 
social responsibility have never bothered to analyze or examine, from 
any clearly defined starting point, even just the benefits they 
anticipate from reform . . . .''), the legal duties of corporate 
managers have remained essentially shareholder-focused. Cf. Elizabeth 
Warren, ``Companies Shouldn't Be Accountable Only to Shareholders'', 
Wall St. J., Aug. 15, 2018 (implicitly acknowledging shareholder 
primacy as the operative legal norm in pushing a reorienting of legal 
duties through the Accountable Capitalism Act); James R. Copland, 
``Senator Warren's Bizarro Corporate Governance'', Economics21.Org, 
Aug. 16, 2018, available at https://economics21.org/warren-backwards-
corporate-governance (criticizing Senator Warren's proposal as 
inconsistent with three pillars of U.S. corporate law--corporate 
federalism, shareholder primacy, and director independence).
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Equity Ownership and Agency Costs
    Just as institutional investment vehicles provide enormous value to 
individuals who wish to invest their assets, equity ownership is 
central to financing innovation and productive investment. By raising 
capital with equity rather than debt, entrepreneurs can finance their 
ventures from dispersed sources without placing any obligation to pay 
funders an immediate or regular cash flow. It is hardly by accident 
that common-stock ownership structures, which emerged in the early 17th 
century in Holland and Britain, remain the principal form of ownership 
for large, complex profit-making institutions today. I fully concur 
with Senator Gramm that our unparalleled economic success is closely 
linked to these ownership structures.
    But just as outsourcing investments has risks, so does equity 
ownership. Equity investors, unlike other corporate stakeholders, are 
unable to protect their interests by contract. The agency costs of 
equity ownership, like those of institutional investing, are very real. 
\6\
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     \6\ As a general matter, equity ownership has substantially higher 
agency costs than alternative forms of ownership. See generally Henry 
Hansmann, ``The Ownership of Enterprise'' 35-49 (1996). Equity 
ownership has long been the dominant form of organization for complex 
profit-making businesses because its other costs of ownership--costs of 
collective decision making and costs of risk-bearing--are substantially 
lower than alternative ownership forms'. See id. Efforts to turn 
homogeneous fiduciary duties (centered on shareholder wealth 
maximization) into heterogeneous fiduciary duties (responsive to 
various ``stakeholder'' interests) directly undercut the low costs of 
collective decision making that have made equity ownership a preferred 
structure for large business organizations. See Stephen M. Bainbridge, 
``The Case for Limited Shareholder Voting Rights'', 53 UCLA L. Rev. 601 
(2006) (arguing that increasing the power of shareholders to hold 
managers accountable, including through increased disclosure, imposes 
significant costs in reduced managerial authority). See generally 
Kenneth J. Arrow, ``Social Choice and Individual Values'' (1963) 
(articulating Arrow's Impossibility Theorem, which holds that, given 
certain fairness criteria, voters facing three or more ranked 
alternatives cannot convert their preferences into a consistent, 
community-wide ranked order of preferences).
---------------------------------------------------------------------------
    American corporate law has been oriented chiefly around managing 
equity owners' agency costs. Common law ``fiduciary duties,'' 
enforceable in court, prohibit management self-dealing. Moreover, 
shareholders are protected by their voting rights--chiefly, the ability 
to elect directors who oversee management. And in companies whose 
shares are traded on public stock exchanges--the regulation of which 
has been the province of the Federal Government since the 1930s--equity 
investors are able to exit their investments easily, by selling their 
shares. Federal securities law aims to require sufficient disclosures 
to permit equity owners to exercise such exit rights with good 
information.
Who's Monitoring the Monitors?
    The central question before the Committee today involves the 
intersection of institutional investing and shareholder voting rights.
    In general, shareholder voting rights have been thought of as a 
tool--complementary to legal fiduciary duties and market exit rights--
to mitigate agency costs between corporate managers and equity owners. 
But such voting rights today are dominated by institutional investors. 
And most of these institutional investors themselves have substantial 
agency costs, between fund managers and individual investors. \7\ 
Institutional investors--either directly or through other 
intermediaries, such as proxy advisory funds--are monitoring corporate 
boards and managers. But who's monitoring the monitors?
---------------------------------------------------------------------------
     \7\ There are exceptions. Some institutional investors, such as 
hedge funds, are substantially owned by their managers. These funds' 
agency costs are limited precisely because the fund managers have a 
large ownership stake--and thus a substantial interest in the funds' 
performance. Of course, such funds may pursue the idiosyncratic 
interests of their owner-managers.
---------------------------------------------------------------------------
    The answer is decidedly not the ordinary, average investor. 
Individual investors delegate their investment decisions to 
intermediaries precisely to avoid complexities like the minutiae of 
proxy voting. Individuals may shift their assets from one fund manager 
to another; but such moves will be prompted by relative portfolio 
performance, or fee structure, or public controversy--not by 
shareholder voting.
    To be sure, some investors will prefer various social-investing 
goals for their assets. That's why social-investing vehicles like Mr. 
Streur's have been able to raise significant amounts of capital. 
Nothing in my comments should be taken to disparage the appropriateness 
of such investment vehicles for investors who prefer them. But 
recognizing that an institutional fund manager's social-investing goal 
may be appropriate for the informed investor who embraces that goal 
does not imply that such a social-investing goal is appropriate for 
institutional asset managers that do not clearly announce to investors 
their social purpose. And it does not imply that such a social-
investing goal should be imported more generally into our investment, 
securities, and corporate laws, nor that such laws should enable actors 
pursuing such goals to impose them on corporate managers.
Shareholder Voting and Special Interests
    Unfortunately, our current body of Federal securities laws, as 
interpreted and enforced by the Securities and Exchange Commission, 
have very much been enabling special interests. Under current SEC 
rules, any shareholder in a publicly traded corporation that has held 
at least $2,000 in stock for at least a year may place a proposal on 
the company's proxy ballot. \8\ A shareholder can introduce the same 
proposal year after year, even when 90 percent of all voting 
shareholders consistently oppose it. \9\
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     \8\ See 17 CFR 240.14a-8 (2007).
    The SEC determines the procedural appropriateness of a shareholder 
proposal for inclusion on a corporation's proxy ballot, pursuant to the 
Securities Exchange Act of 1934, Pub. L. No. 73-291, Ch. 404, 48 Stat. 
881 (1934) (codified at 15 U.S.C. 78a-78oo (2006 & Supp. II 2009)), 
at 78m, 78n, and 78u; 15 U.S.C. 80a-1 to 80a64 (2000) (pursuant to 
Investment Company Act of 1940, Pub. L. No. 76-768, 54 Stat. 841 
(1940)); but the substantive rights governing such measures and how 
they can force boards to act remain largely a question of State 
corporate law: as the Supreme Court emphasized in its 1987 decision in 
CTS Corp. v. Dynamics Corp., ``[n]o principle of corporation law and 
practice is more firmly established than a State's authority to 
regulate domestic corporations, including the authority to define the 
voting rights of shareholders.'' 481 U.S. 69, 89.
    The section of the Securities Exchange Act upon which Rule 14a-8 is 
promulgated, 14(a), is principally designed to ensure corporate 
disclosures to shareholders to afford investment information and 
prevent deception. See J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) 
(``The purpose of 14(a) is to prevent management or others from 
obtaining authorization for corporate action by means of deceptive or 
inadequate disclosure in proxy solicitation.''). In its 1990 Business 
Roundtable decision, the D.C. Circuit Court of Appeals explained 
further:
    That proxy regulation bears almost exclusively on disclosure stems 
as a matter of necessity from the nature of proxies. Proxy 
solicitations are, after all, only communications with potential 
absentee voters. The goal of Federal proxy regulation was to improve 
those communications and thereby to enable proxy voters to control the 
corporation as effectively as they might have by attending a 
shareholder meeting.
    Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990) (``While 
the House Report indeed speaks of fair corporate suffrage, it also 
plainly identifies Congress's target--the solicitation of proxies by 
well informed insiders `without fairly informing the stockholders of 
the purposes for which the proxies are to be used.' '' (citing H.R. 
Rep. No. 1383, 73d Cong., 2d Sess. 14 (1934))). See also S. Rep. No. 
792, 73d Cong., 2d Sess. 12 (1934) (characterizing purpose of proxy 
protections as ensuring stockholders' ``adequate knowledge'' about the 
``financial condition of the corporation'').
     \9\ See Amendments to Rules on Shareholder Proposals, Exchange Act 
Release No. 40,018; 63 FR 29,106, 29,108 (May 28, 1998) (codified at 17 
CFR pt. 240).
---------------------------------------------------------------------------
    These rules have enabled special-interest shareholders to capture 
the attention of corporate boards and managers, at all other 
shareholders' expense. For example, when McDonald's stockholders 
gathered for the company's annual meeting in 2017, they had to vote on 
seven shareholder proposals. Among these were a proposal against the 
company's use of antibiotics in its meat supply, brought by the 
Benedictine Sisters of Boerne, Texas; and one by the nonprofit Holy 
Land Principles, which wanted the company to modify its employment 
practices in Israel. The Boerne Sisters owned 52 McDonald's shares. The 
Holy Land group owned 47. No shareholder sponsoring a proposal at the 
company's annual meeting that year owned more than 0.0001 percent of 
the company's stock.
    This example is not anomalous. In 2016 and 2017, a majority of 
shareholder proposals sponsored at Fortune 250 companies involved 
social or policy issues largely unrelated to share value, executive 
compensation, or traditional board-governance concerns. Last year, many 
of our largest publicly traded companies faced four or more shareholder 
proposals on their corporate proxy ballot, including AmerisourceBergen, 
AT&T, Chevron, Citigroup, Dow Chemical, DuPont, Eli Lilly, Emerson 
Electric, ExxonMobil, Facebook, Ford, General Electric, Google, Home 
Depot, JPMorgan Chase, McKesson, and Starbucks. \10\ In every year for 
the last decade, no more than 1 percent of these shareholder proposals 
were sponsored by institutional investors without a social-investing 
purpose or orientation, or a tie to public employees or organized 
labor. The SEC's lenient shareholder-proposal rules have also empowered 
a very small number of investors with limited investment stakes to 
assume an outsized role in corporate-boardroom debates; three 
individuals and their family members--commonly called ``corporate 
gadflies''--have sponsored between 25 percent and 45 percent of all 
shareholder proposals in recent years. \11\
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     \10\ This list of companies is underinclusive. Some other 
companies received multiple shareholder proposals that they ultimately 
excluded from their proxy ballots after asking for, and receiving, ``no 
action'' letters from the SEC.
     \11\ The broader problems with the SEC's Rule 14a-8 are beyond the 
scope of this testimony. For a deeper dive into those issues, see my 
House subcommittee testimony on the subject from fall 2016, referenced 
and linked at the end of this statement.
---------------------------------------------------------------------------
    Today, navigating the special-interest investor is simply an 
expected cost of being a publicly traded corporation. In February, 
jeans-maker Levi Strauss filed the paperwork to become a publicly 
traded corporation. In March, the People for the Ethical Treatment of 
Animals announced it was acquiring shares in Levi's in order to propose 
shareholder resolutions involving the manufacturer's use of leather 
patches. PETA's decision was not related to investment concerns; it 
announced it was acquiring the minimum number of shares required to 
reach the SEC's $2,000 threshold. \12\
---------------------------------------------------------------------------
     \12\ Tanya Garcia, ``PETA Takes a Stake in Levi's To Press for 
Vegan Leather Patches'', Marketwatch, Mar. 22, 2019, https://
www.marketwatch.com/story/peta-takes-a-stake-in-levis-to-press-for-
vegan-leather-patches-2019-03-22.
---------------------------------------------------------------------------
    Historically, groups like PETA have been able to garner significant 
attention through introducing proxy ballot items but have been unable 
to win the support of a majority of shareholders for their precatory 
ballot items. But some caution is in order. Beyond institutional 
investors with an express social-investing purpose, many investment 
vehicles with large holdings are affiliated with organized labor. In 
2011, the Office of the Inspector General of the Department of Labor 
found that labor pension funds may be using ``plan assets to support or 
pursue proxy proposals for personal, social, legislative, regulatory, 
or public policy agendas.'' \13\ Pension funds managed for State and 
municipal public employees, which are often wholly or partly controlled 
by partisan elected officials, have often overtly pursued social goals 
in managing their investment resources, as well as in voting shares.
---------------------------------------------------------------------------
     \13\ Dep't of Labor, Office of the Inspector General, ``Proxy-
Voting May Not Be Solely for the Economic Benefit of Retirement 
Plans'', (2011), available at http://www.oig.dol.gov/public/reports/oa/
2011/09-11-001-12-121.pdf.
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The Role of Proxy Advisory Firms
    Proxy advisory firms can serve to amplify such special-interest 
advocacy. To manage their proxy voting, institutional investors rely 
heavily on a pair of proxy advisory firms, Institutional Shareholder 
Services, or ISS, which is today owned by private-equity firm Genstar 
Capital; \14\ and Glass, Lewis & Co., a subsidiary of the Ontario 
Teachers' Pension Plan Board. \15\ Together, these two proxy advisors 
control approximately 97 percent of the market for proxy advisory 
services, with ISS alone having about a 61 percent share. \16\ By its 
own estimation, ISS annually helps approximately 2,000 clients execute 
nearly 10.2 million ballots representing more than 4.2 trillion shares. 
\17\
---------------------------------------------------------------------------
     \14\ See Genstar Capital: Institutional Shareholder Services, 
https://www.gencap.com/companies/iss/.
     \15\ See Robyn Bew and Richard Fields, ``Voting Decisions at U.S. 
Mutual Funds: How Investors Really Use Proxy Advisers'', 6 (Tapestry 
Networks, Inc. and Investment Research Center Institute, June 2012), 
http://www.tapestrynetworks.com/issues/corporate-governance/upload/
Voting-Decisions-at-US-Mutual-Funds-June-2012.pdf.
     \16\ See James K. Glassman and J. W. Verret, ``How To Fix Our 
Broken Proxy Advisory System'', 8 (Mercatus Center, George Mason Univ., 
2013), available at http://mercatus.org/sites/default/files/
Glassman_ProxyAdvisorySystem_04152013.pdf.
     \17\ Institutional Shareholder Services, About ISS, http://
www.issgovernance.com/about/about-iss.
---------------------------------------------------------------------------
    As summarized in a 2018 report I coauthored with Stanford's David 
Larcker and Brian Tayan, a substantial body of empirical evidence shows 
that proxy advisory firms' recommendations influence institutional 
investor voting and that publicly traded companies are influenced by 
proxy advisor guidelines. \18\ A 2012 analysis I coauthored showed that 
an ISS recommendation ``for'' a given shareholder proposal, controlling 
for other factors, was associated with a 15-percentage-point increase 
in the shareholder vote for any given proposal. \19\ As Leo Strine, a 
former chancellor on the Delaware Court of Chancery, observed: 
``Powerful CEOs come on bended knee to Rockville, Maryland, where ISS 
resides, to persuade the managers of ISS of the merits of their views 
about issues.'' \20\
---------------------------------------------------------------------------
     \18\ See James R. Copland et al., ``Proxy Advisory Firms: 
Empirical Evidence and the Case for Reform'' (Manhattan Institute 
2018), available at https://media4.manhattan-institute.org/sites/
default/files/R-JC-0518-v2.pdf.
     \19\ See James R. Copland et al., ``Proxy Monitor 2012: A Report 
on Corporate Governance and Shareholder Activism'' 22-23 (Manhattan 
Inst. for Pol'y Res., Fall 2012), available at http://
www.proxymonitor.org/Forms/pmr_04.aspx.
     \20\ Leo E. Strine, Jr., ``The Delaware Way: How We Do Corporate 
Law and Some of the New Challenges We (and Europe) Face'', 30 Del. J. 
Corp. L. 688 (2005).
---------------------------------------------------------------------------
    My report with professors Larcker and Tayan also cites a 
substantial body of empirical evidence demonstrating that at least some 
proxy-advisor advice may not be in the average shareholder's interest. 
Notwithstanding its substantial influence over shareholder voting, ISS 
is a relatively small operation. Prior to its 2014 private acquisition, 
ISS had just over $15 million in profits on $122 million in revenues. 
\21\ Its small size makes ISS particularly vulnerable to capture, if it 
is being managed to maximize its profits. And ISS's voting guidelines 
have generally shown a propensity to support various social and 
environmental proposals, much more so than the median shareholder. 
Historically, ISS has backed some 70 percent of shareholder proposals 
related to political spending, 45 percent of those related to 
employment rights, and 35 percent of those related to human rights or 
the environment \22\--a sharp contrast to the dearth of average 
shareholder support for these proposal classes. In general, ISS support 
for these social issues has been increasing.
---------------------------------------------------------------------------
     \21\ See MSCI 2013 Annual Report 70, ``Summary of Operations'', 
``Governance'', available at http://files.shareholder.com/downloads/
MSCI/3458217323x0x739303/DAB046E7-737E-43C7-9114-040465AD560E/
2013_Annual_Report.pdf. ISS was acquired by Genstar in September 2017 
for a reported $720 million. See Nikhil Subba and Diptendu Lahiri, 
``Genstar Capital To Buy Proxy Advisory Firm ISS for $720 Million'', 
Reuters, Sept. 7, 2017, available at https://www.reuters.com/article/
us-institutional-shareholder-services-m/genstar-capital-to-buy-proxy-
advisory-firm-iss-for-720-million-idUSKCN1BI20C. This valuation implies 
significant realized growth--or anticipated future growth--for ISS. But 
the proxy advisor's market valuation remains very small relative to its 
influence over stock market proxy voting.
     \22\ See Copland et al., supra n. 23, at 22-23.
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Institutional Investors, Agency Costs, and Shareholder Voting
    With trillions of assets under management, large mutual fund 
families are less susceptible to capture than proxy advisors. But at 
least some large, diversified mutual funds have also been moving to 
support some social and environmental causes in discussions with 
corporate managers. On March 7, 2017, State Street Global Advisers, the 
world's third-largest institutional investor, launched a campaign to 
pressure companies to add more women to their boards--symbolically 
installing a bronze statue, ``Fearless Girl'', facing the iconic 
``Charging Bull'' that has graced Wall Street since 1989. Less than a 
week later, BlackRock, the world's largest mutual fund company, 
announced that it, too, would prioritize talking with companies on 
``gender balance on boards,'' as well as ``climate risk.'' And by the 
next winter, Fink issued his letter.
    Had institutional investors suddenly decided that their previous 
reluctance to embrace social and environmental causes had been 
misguided--and that these issues were now key factors in maximizing 
share return? The answer is almost surely no, however fund families 
spin their efforts through public-relations releases. In the winter of 
2017, Walden Asset Management and other social-investing and public-
pension investors had introduced a proposal at BlackRock, scheduled for 
the investment firm's own May 2017 annual meeting. \23\ The proposal 
asked BlackRock to clarify its own voting policies on social and 
environmental shareholder issues. Reportedly, the social investors' 
``move was partly motivated by frustration [that] BlackRock and some 
other large shareholders like Vanguard . . . declined to support a 
single shareholder proposal on board diversity or climate change in 
2016.'' \24\ Walden and other investors made similar pushes at JPMorgan 
Chase, Bank of New York Mellon, T. Rowe Price, and Vanguard.
---------------------------------------------------------------------------
     \23\ See Emily Chasan, ``BlackRock Finds Shareholder Action Goes 
Both Ways'', Bloomberg Briefs, Mar. 16, 2017, available at https://
newsletters.briefs.bloomberg.com/document/
ZAq33YrjbIsCER50poBT1g_9ez25goq72ezes8vkh/front.
     \24\ Id.
---------------------------------------------------------------------------
    The sponsors of the 2017 socially oriented proposals did not manage 
many assets relative to BlackRock. In total, the sponsoring investors 
managed $3.5 billion; BlackRock manages some $5 trillion. Still, the 
reaction of BlackRock, State Street, and other fund families may 
reflect economic self-interest. Such funds' fee structures tend to be a 
function of assets under management. Thus, such institutional investors 
may be sensitive to marginal investors' preferences: a sustained and 
successful effort to divest from a large mutual-fund family could cause 
a drop in the funds' assets under management.
    To be sure, assets under management will also be highly sensitive 
to investment returns. But the relevant figure for investment returns 
is relative to other fund managers. A general decline in market 
performance over some baseline will negatively affect fund performance 
over the long run, but in the short run, an asset manager's earnings 
are likely to be much more sensitive to an asset-divestment campaign. 
This is particularly true if other institutional investors are making 
parallel choices--as a divestment-style campaign against an 
institutional investor would be much more likely to have an impact if a 
fund was an outlier among its peers. Thus, social-investing activists 
may be able to engender a ``cascade'' effect among fund managers; once 
one succumbs to a pressure campaign, others will follow.
    Such risks are heightened by the fact that portfolio managers 
themselves--those who buy and sell securities for institutional 
investing fund families--tend not to involve themselves heavily in 
shareholder voting. A survey of 64 asset managers and owners with a 
combined $17 trillion in assets, sponsored by RR Donnelley, Equilar, 
and the Rock Center for Corporate Governance at Stanford University, 
finds that portfolio managers are only moderately involved in voting 
decisions. Among large institutional investors with assets under 
management greater than $100 billion, portfolio managers are involved 
in only 10 percent of voting decisions. \25\
---------------------------------------------------------------------------
     \25\ See David F. Larcker et al., ``2015 Investor Survey: 
Deconstructing Proxies--What Matters to Investors'', Feb. 2015, https:/
/www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survyey-
2015-deconstructing-proxy-statements_0.pdf.
---------------------------------------------------------------------------
    Rather than portfolio managers, large institutional investors tend 
to have in-house corporate-governance teams to handle proxy voting 
matters. These in-house positions are often staffed by former employees 
of proxy advisors--thus sharing those proxy advisors' biases--or are 
otherwise at least somewhat committed to environmental- or social-
investing causes. State Street, the world's third-largest institutional 
investor, delegates oversight of these issues to Rakhi Kumar, head of 
ESG investments and asset stewardship. Ms. Kumar has no apparent 
experience trading in securities, \26\ but she envisions for herself a 
broad role in overseeing aspects of corporate management both broad and 
granular: at the SEC's proxy process roundtable in November 2018, Ms. 
Kumar talked about how she was working with corporate executives to 
change terms of maternity leave and to manage hog farms in North 
Carolina. It is hard to see what specialized expertise Ms. Kumar has 
over hog farming. But when shares are concentrated in large fund 
families' hands--and proxy advisors like ISS threaten to withhold 
support for corporate directors who fail to act upon any shareholder 
proposal that receives majority shareholder support \27\--it's little 
wonder that company leaders pay attention.
---------------------------------------------------------------------------
     \26\ See ``State Street Global Advisors--Who We Are: Rakhi 
Kumar'', https://www.ssga.com/global/en/about-us/who-we-are/
team.bio.36520799.html.
     \27\ See ISS, ``United States Proxy Voting Guidelines: Benchmark 
Policy Recommendations'', https://www.issgovernance.com/file/policy/
active/americas/US-Voting-Guidelines.pdf, at 13.
---------------------------------------------------------------------------
    Such sweeping policy oversight by institutional investors is far 
afield from the agency costs shareholder voting rights are intended to 
mitigate. It is particularly strange when employed by index funds. The 
premise of such funds is to leverage capital-market efficiency and 
minimize active management costs--in essence, to follow the stock 
market. Yet in shareholder-voting decisions, such fund families are 
actively supporting efforts to modify corporate behavior. There is no 
clear investment-based rationale for this obvious tension in strategy.
The Costs of Socially Oriented Shareholder Activism
    The aggressive sweep of shareholder influence over corporate 
handling of far-flung social and environmental causes can hurt 
shareholder value. Entrepreneurs and investors tend to opt for equity 
ownership notwithstanding high agency costs. Aside from the risk-
bearing advantages of equity, there is good reason to believe that one 
reason why we tend to see shareholder ownership as the dominant form of 
complex business organization is that it minimizes collective decision-
making costs. \28\ Other forms of ownership--such as employee 
ownership, customer ownership, and supplier ownership--can handle risk-
bearing to some significant extent but tend only to exist in limited 
circumstances. And in such cases, rules tend to exist to limit the 
costs of disparate interests in decision making--like law firms' strong 
bias toward screening partners for a preference for very high work 
hours. Understanding that disparate voting interests along multiple 
factors can make collective action difficult requires no specialized 
understanding of public-choice theory--and should be quite evident to 
members of the United States Senate.
---------------------------------------------------------------------------
     \28\ See Hansmann, supra n. 10.
---------------------------------------------------------------------------
    In 2015, the Manhattan Institute commissioned an econometric study 
of shareholder activism and firm value. \29\ Tracie Woidtke, a 
professor at the Haslam College of Business at the University of 
Tennessee, \30\ examined the valuation effects associated with public 
pension fund influence, measured through ownership, on Fortune 250 
companies. Woidtke found that ``public pension funds' ownership is 
associated with lower firm value'' and, more particularly, that 
``social-issue shareholder-proposal activism appears to be negatively 
related to firm value.'' \31\ As such, public employee pension funds' 
use of the shareholder-proposal process in an effort to affect 
corporate behavior in pursuit of social or policy goals may be harming 
the financial interests of plan beneficiaries--and ultimately State and 
local taxpayers--as well as, by inference, the average diversified 
investor.
---------------------------------------------------------------------------
     \29\ See Tracie Woidtke, ``Public Pension Fund Activism and Firm 
Value'' (Manhattan Institute 2015), available at https://www.manhattan-
institute.org/html/public-pension-fund-activism-and-firm-value-
7871.html.
     \30\ See ``The University of Tennessee Knoxville: Tracie 
Woidtke'', http://finance.bus.utk.edu/Faculty/TWoidtke.asp.
     \31\ See Woidtke, supra n. 29, at 16.
---------------------------------------------------------------------------
Conclusion
    In recent years, regulatory changes and changes in market ownership 
have combined to increase the shareholder voting power of institutional 
investors. Abetted by SEC rules and procedures, idiosyncratic 
``corporate gadflies'' and institutional investors with labor 
affiliations and social-investing orientations have gained power in the 
boardroom. By coopting proxy advisory firms--and, to some degree, 
institutional investors facing their own significant agency costs--
these activists have pursued their agendas at other shareholders' 
expense. At least some of this social activism appears to be depressing 
share value.
    Diagnosing the problems with the status quo is to some extent 
easier than proposing solutions, which is beyond the scope of this 
statement. I am happy to discuss ideas with Members of the Committee. I 
am also listing below earlier writings I have written or published. 
Please consider these citations incorporated by reference, and please 
feel free to reach out to me about any of the listed writings as well 
as my principal testimony. Thank you for your time and consideration.

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                   PREPARED STATEMENT OF JOHN STREUR
           President and CEO, Calvert Research and Management
                             April 2, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the invitation to testify before you today. My name is 
John Streur and I am the President and Chief Executive Officer of 
Calvert Research and Management, an investment management firm based in 
Washington, DC, that invests across global capital markets. Our firm 
incorporates into our investment decisions information about 
corporations' (and other issuers of securities) exposure to, and 
management of, financially material environmental, societal, and 
governance (ESG) factors. Calvert is a subsidiary of Eaton Vance 
Management, a leading global asset manager based in Boston. \1\
---------------------------------------------------------------------------
     \1\ Calvert Research and Management (``Calvert'' or ``CRM'') is an 
investment adviser registered under the Investment Advisers Act of 
1940, as amended (Advisers Act). Calvert is a Massachusetts business 
trust formed in August 2016 as a wholly-owned subsidiary of Eaton Vance 
Management (EVM). On December 30, 2016, Calvert completed its purchase 
of substantially all of the business assets of Calvert Investment 
Management, Inc. (CIM). Calvert's purchase of the assets of CIM 
included all technology, know-how, intellectual property and the 
Calvert Research System and processes. After approval of the Board of 
Directors/Trustees and shareholders of the Calvert Funds, Calvert also 
became the successor investment manager to the registered investment 
management companies that CIM had been manager of prior to the 
transaction. In addition, Calvert hired the vast majority of the 
employees that were part of CIM's sustainability research department. 
As a result, references related to the activity of CIM prior to the 
purchase of its assets on December 30, 2016, are deemed herein to be 
the activity of Calvert.
---------------------------------------------------------------------------
    Our firm sponsors one of the largest and most diversified families 
of responsibly invested mutual funds, encompassing active, and 
passively managed equity, fixed income, alternative, and multi-asset 
strategies. As of February 28, 2019, across our portfolios, we held 
more than 5,600 securities from over 4,800 issuers in developed and 
emerging markets. Our primary focus is to generate favorable investment 
returns for our clients by allocating capital consistent with 
financially material ESG analysis and through structured engagement 
with portfolio companies.
    As a participant in the global capital markets focused on long-term 
value creation for our clients, we understand that most corporations 
and other issuers of securities deliver a strong net benefit to 
society, through their products and services, creation of jobs and the 
sum of their behaviors. The world has experienced unmatched economic 
growth over the course of the last century and we recognize that free 
market capitalism and competition have made a significant contribution 
in lifting living standards globally.
    Today, companies and investors throughout the world are working to 
better understand how to further the tremendous progress that 
corporations, competition and capitalism create by conducting a deeper 
analysis of environmental and societal impacts and of corporate 
governance systems in place worldwide. As a firm, we are part of a 
rapidly expanding base of institutional investors and asset owners 
globally who seek to strengthen corporations and capitalism through 
improved performance on financially material environmental risk 
management, job creation, operational efficiency, and other factors 
understood through analysis of environmental and social impact factors.
The Evolution of ESG Investment Strategies
    In recent years, interest in corporate exposure to issues such as 
energy efficiency, water conservation, workplace diversity and human 
rights has intensified. A heightened awareness of these issues among 
consumers and investors alike has pushed ESG investing well into the 
mainstream. In 2018, more than $12 trillion in the United States was 
invested in strategies that consider ESG criteria--a 38 percent 
increase since 2016.This $12 trillion represents 26 percent of 
professionally managed assets in the United States, which total $46.6 
trillion. \2\
---------------------------------------------------------------------------
     \2\ US SIF: The Forum for Sustainable and Responsible Investment. 
2018 Report on U.S. Sustainable. Responsible and Impact Investing 
Trends. Data points are as of December 31 of the preceding year.
---------------------------------------------------------------------------
    In 2010, there were 281 registered investment companies that 
incorporated ESG factors into their investment process. Last year, in 
2018, that figure had risen to 730--a 2.6x increase in just 8 years. 
\3\
---------------------------------------------------------------------------
     \3\ Ibid.
---------------------------------------------------------------------------
    Investors are not the only ones changing their behavior--
corporations are also taking action. Many companies in the United 
States have increased their focus on actively managing and reporting on 
ESG risks in order to remain competitive in the global market for 
products and services. Eight years ago, just 20 percent of the S&P 500 
provided any type of reporting on relevant ESG risks. Today, 85 percent 
of companies in the S&P 500 actively report on ESG risks factors. \4\
---------------------------------------------------------------------------
     \4\ Governance and Accountability Institute, Inc. ``Flash Report: 
85 percent of the S&P 500 Companies Published Corporate Sustainability 
Reports in 2017''. March 20, 2018.
---------------------------------------------------------------------------
    A common misconception about ESG investment strategies is that 
incorporating environmental, social, and governance considerations into 
an investment process requires the investor to sacrifice returns. 
Calvert partnered with Professor George Serafeim at Harvard University 
to conduct research on this topic. Among other findings, we learned 
that firms in the top quintile of performance on financially material 
ESG issues significantly outperformed those in the bottom quintile. If 
an investor had invested $10,000 in 1993 in a portfolio of stocks 
performing in the top quintile on relevant ESG factors, by 2014 that 
portfolio would have returned more than twice that of a portfolio of 
stocks performing in the bottom quintile on financially material ESG 
factors. \5\
---------------------------------------------------------------------------
     \5\ George Serafeim, ``The Role of the Corporation in Society: 
Implications for Investors'', September 2015. Source: Adapted from 
Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., ``Corporate 
Sustainability: First Evidence on Materiality'', (November 9, 2016). 
``The Accounting Review'', Vol. 91, No. 6, pp. 1697-1724. Available at 
SSRN: https://ssrn.com/abstract=2575912 or https://dx.doi.org/10.2139/
ssrn.2575912.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The business case for incorporating ESG considerations into the 
investment process is well grounded in empirical evidence. A recent 
study that aggregated the results of 2,200 studies on the topic 
concluded that the vast majority found positive correlations between 
corporate financial performance and ESG considerations that are 
financially material to that business. \6\ Associated financial 
benefits included lower costs of capital, improved operating 
performance, and stronger free cash flow.
---------------------------------------------------------------------------
     \6\ Gunnar Friede and Timo Busch, ``ESG and Financial Performance: 
Aggregated Evidence From More Than 2,000 Empirical Studies''. 2015. 
available at: https://www.tandfonline.com/doi/full/10.1080/
20430795.2015.1118917.
---------------------------------------------------------------------------
    The rapidly growing action being taken to incorporate ESG factors 
into the business practices of U.S. corporations and the investment 
processes of U.S. investment management firms is a conscious attempt by 
these entities to strengthen our capitalist system and ensure U.S. 
firms maintain a competitive position globally. The Principles for 
Responsible Investment (PRI), an international network of firms 
incorporating ESG factors into their investment and ownership decisions 
that launched at the U.S.'s own New York Stock Exchange in 2006, now 
include over 2,300 investment firms globally as signatories. \7\
---------------------------------------------------------------------------
     \7\ Principles for Responsible Investment, ``About'', 2018, 
available at: https://www.unpri.org/pri/about-the-pri.
---------------------------------------------------------------------------
    All too often, a genuine focus on ESG considerations by corporate 
entities and financial firms is associated with a narrow set of 
politicized issues, and the potential withholding of capital access or 
other financial products and services from lawful and legitimate 
businesses. Our firm seeks to inclusively invest in issuers that are 
positioned to capitalize on what we see as a long-term macroeconomic 
trend toward a more sustainable future. It is critical that the U.S. 
capital markets' infrastructure and regulatory policy keep pace with 
these global trends in order to maintain our economic competitiveness.
Disclosure Standardization of Environmental, Social, and Governance 
        Risk Factors
    Corporate disclosure standards have evolved over time to reflect 
changing industry trends as well as regulatory and judicial 
developments. Undoubtedly, there has been a great deal of discussion 
and debate amongst the investment community, regulatory authorities, 
and Members of this Committee as to the need or degree to which 
particular environmental, social or governance data should be disclosed 
by public issuers of securities. Rather than address specific proposals 
or existing petitions for actions on rulemaking, I would like to 
briefly speak to this issue's relevance as it pertains to the benefits 
of standardization and the competitiveness of U.S. capital markets.
    In the United States, we are fortunate to have the deepest, most 
liquid and most developed capital market in the world. Our financial 
economy has proven to be a strategic competitive advantage for the 
Nation. The efficient flow of capital that it provides has enabled 
companies of all sizes to innovate, create jobs, and contribute to an 
enhanced quality of life for Americans. Yet, when it comes to the issue 
of standardizing disclosures related to ESG risk factors, we are behind 
many other developed economies around the globe.
    As I mentioned earlier, 85 percent of companies in the S&P 500 
already actively report on ESG risk factors voluntarily, through 
corporate sustainability reports or other corporate disclosures. 
However, much of the information provided through voluntary disclosures 
is difficult to compare and inconsistent across issuers, resulting in 
considerable costs and resource expenditure for investors. While it is 
impossible to discern the amount of expense incurred by investors 
attempting to discern ESG data, one estimate suggests that by 2020, 
$745 million will be spent globally on ESG data alone. \8\
---------------------------------------------------------------------------
     \8\ ESG Data: Mainstream Consumption, Bigger Spending, January 9, 
2019, available at: www.optimas.com/research/428/detail/.
---------------------------------------------------------------------------
    The PRI, \9\ along with MSCI, a global data and investment research 
provider, recently identified 300 policy initiatives that promoted 
sustainable finance in 50 of the largest economies around the globe. 
Two hundred of those initiatives were corporate reporting requirements 
covering ESG factors. \10\ There are now seven stock exchanges--in 
Australia, Brazil, India, Malaysia, Norway, South Africa, and the 
United Kingdom--where companies must have some degree of environmental 
or social disclosure in order to meet the exchanges' requirements to 
list. In 2018, the China Securities Regulatory Commission introduced 
requirements that will mandate all listed companies and bond issuers in 
China disclose environmental, social, and governance risks associated 
with their operations. \11\
---------------------------------------------------------------------------
     \9\ Principles for Responsible Investment, ``About'', 2018, 
available at: https://www.unpri.org/pri/about-the-pri.
     \10\ PRI and MSCI, Global Guide to Responsible Investment 
Regulation, 2016, available at https://www.unpri.org/page/responsible-
investment-regulation.
     \11\ Latham and Watkins LLP, ``China Mandates ESG Disclosures for 
Listed Companies and Bond Issuers'', 2018, available at https://
www.globalelr.com/2018/02/china-mandates-esg-disclosures-for-listed-
companies-and-bond-issuers/.
---------------------------------------------------------------------------
    These Nations recognize that the competition for capital and 
investment is fiercely competitive and global in nature. Of course, the 
United States should always act in the best interests of its own 
citizens and balance concerns from a variety of constituencies. 
However, failing to take action to standardize ESG disclosures may 
afford other Nations the opportunity to shape global standards that 
ultimately impact U.S. capital markets and our Nation's economic 
competitiveness.
    Finally, Calvert recognizes that as investors, our success is 
intrinsically linked to the success of the companies and issuers in 
which we are invested. We would advocate that any rulemaking or action 
regarding disclosure be done in a deliberate and fair process that 
balances the need for reliable and complete information on ESG 
considerations along with limiting any unnecessary regulatory burden.
Structured Engagement and the Role of Proxy Advisory Firms
    Given that the title of today's hearing explicitly addresses the 
role of proxy advisory firms, I would like to take this opportunity to 
share how our firm utilizes those services. A core part of Calvert's 
investment approach is structured engagement with companies and 
management teams in an attempt to improve both the enterprise value of 
the firms in which we are invested and address their environmental and 
social impact. We believe that active ownership is essential for 
improving one's position as a shareowner and that including engagement 
as a key element of our process is our duty as responsible stewards of 
our client's capital.
    ESG strategies have often been characterized by the exclusion of 
certain companies from a portfolio because of either controversial 
events or objectionable products or practices. At Calvert, we believe 
it is best to invest as inclusively as possible and work with companies 
strategically to drive positive change and long-term shareholder value.
    Proxy advisory firms, the two most predominant firms being 
Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass 
Lewis), play an important role in the institutional investment 
ecosystem. We are aware that ISS and Glass Lewis provide ESG-related 
voting recommendations and that these organizations have taken 
positions related to shareholder proposals on ESG topics.
    Calvert views its relationship with proxy advisory firms as one 
that can be accurately defined as just that--an advisor. We have 
developed our own customized set of Global Proxy Voting Guidelines, 
which are publicly available on our website, \12\ and outline our 
approach to voting on critical issues facing corporations. In addition 
to using a proxy advisory firm to assist in vote execution, we 
subscribe to custom research services so that our proxy advisor can 
perform the research necessary to make voting recommendations based on 
our Global Proxy Voting Guidelines. That said, the decisions on how and 
when to vote are solely Calvert's.
---------------------------------------------------------------------------
     \12\ https://www.calvert.com/Proxy-Voting.php
---------------------------------------------------------------------------
    In an effort to remain as transparent as possible, we also post 
votes to the Calvert website within 72 hours of being cast and, in 
almost all cases, in advance of the meeting so that Calvert's clients 
and the general public can see how we voted on behalf of our clients. 
During the 2018 Proxy Season, which ran from July 1, 2017, to June 30, 
2018, we voted at 4,425 meetings on issues ranging from climate change 
and energy to board diversity and sustainability reporting.
    We believe proxy advisors serve a valuable role in providing 
research services to the investment industry. Further, the actual 
process of properly casting votes and maintaining records is 
transaction intensive and the ability to outsource these functions to 
specialized service providers provides operational efficiency to the 
U.S. asset management industry.
    Much of the criticism that is directed toward proxy advisory firms 
in today's policy debate often appears from sources other than the 
institutional investors that voluntarily choose to utilize the services 
of proxy advisory firms. Ultimately, we would not favor any additional 
actions that would compromise the independence of the research and 
advice we receive from these vendors or impose unnecessary costs or 
burdens on investment firms.
Conclusion
    I would like to again thank the Committee for allowing me the 
opportunity to share my perspectives on these important topics. My 
sincere hope is that this forum provides an opportunity for 
constructive dialogue on how to balance the ongoing competitiveness of 
U.S. capital markets, investment management firms, and corporations 
with the need to ensure that our capitalist system achieves the most 
sustainable future possible.
               RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR CORTEZ MASTO FROM PHIL GRAMM

Q.1. Index funds are increasingly voting in favor of ESG issues 
to amplify their public image. Investors believe voting for ESG 
proposals will help them recruit more investor-clients. Do you 
think the existing customers of index funds also support ESG 
issues?

A.1. I don't know whether existing customers support ESG issues 
or not. There are funds that are committed to promoting ESG 
type issues which investors could invest in if they put a 
premium on those issues.

Q.2. If a company is vulnerable to legal challenges based on 
its actions relating to ESG issues, should investors be aware 
of those risks?

A.2. If companies are vulnerable to legal challenges based on 
ESG issues you would have to assume that management, in 
carrying out its fiduciary responsibility, would be responsive 
to these concerns. If the issue is raised at a stockholder 
meeting anyone could make a point concerning legal liability. 
What legal liabilities rise to the level that the company 
should notify stockholders is another question altogether since 
companies face the potential of legal liability in literally 
thousands of areas.

Q.3. If ESG disclosures would put companies at risk of legal 
liability, should investors have this transparency to inform 
their future investment decisions?

A.3. If any legal liability is material to the operation of the 
company and its future prospects, a company would be required 
under current law to notify investors.

Q.4. ESG funds are part of the marketplace of options where 
people can invest their hard earned money and do so with 
quality returns. Why do you propose restricting Americans' 
choices to disinvest from poorly performing companies that go 
against their own personal values?

A.4. I don't support restricting anyone's choices. What I 
oppose is index funds promoting their profitability and not the 
well-being of their investors.

Q.5. During the hearing, you stated that an investor could 
offer a shareholder proposal, be the only one to vote for it, 
and then offer it again the next year. That is not correct. 
What is the minimum thresholds for shareholder proposals to be 
offered again in previous years?

A.5. Under current SEC rules, over 97 percent of the 
shareholders must vote no on a shareholder proposal or it can 
be put up for another vote the very next season. I misspoke in 
my Committee testimony.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
           SENATOR CORTEZ MASTO FROM JAMES R. COPLAND

Q.1. If a company is vulnerable to legal challenges based on 
its actions relating to ESG issues, should investors be aware 
of those risks?

A.1. As a general matter, publicly traded corporations do 
regularly include risk disclaimers of this sort in public 
documents filed under SEC regulations. For instance, Amazon's 
10-K discloses a host of risk factors, including those related 
to legal and regulatory matters:

        We may have limited or no experience in our newer 
        market segments, and our customers may not adopt our 
        offerings. These offerings may present new and 
        difficult technology challenges, and we may be subject 
        to claims if customers of these offerings experience 
        service disruptions or failures or other quality 
        issues. . . .

        Because we process, store, and transmit large amounts 
        of data, including personal information, failure to 
        prevent or mitigate data loss or other security 
        breaches, including breaches of our vendors' or 
        customers' technology and systems, could expose us or 
        our customers to a risk of loss or misuse of such 
        information, adversely affect our operating results, 
        result in litigation or potential liability for us, 
        deter customers or sellers from using our stores and 
        services, and otherwise harm our business and 
        reputation. . . .

        Other parties also may claim that we infringe their 
        proprietary rights. We have been subject to, and expect 
        to continue to be subject to, claims and legal 
        proceedings regarding alleged infringement by us of the 
        intellectual property rights of third parties. Such 
        claims, whether or not meritorious, may result in the 
        expenditure of significant financial and managerial 
        resources, injunctions against us, or the payment of 
        damages, including to satisfy indemnification 
        obligations. . . .

        We are subject to general business regulations and 
        laws, as well as regulations and laws specifically 
        governing the Internet, physical, e-commerce, and 
        omnichannel retail, electronic devices, and other 
        services. Existing and future laws and regulations may 
        impede our growth. These regulations and laws may cover 
        taxation, privacy, data protection, pricing, content, 
        copyrights, distribution, transportation, mobile 
        communications, electronic device certification, 
        electronic waste, energy consumption, environmental 
        regulation, electronic contracts and other 
        communications, competition, consumer protection, 
        employment, trade and protectionist measures, web 
        services, the provision of online payment services, 
        information reporting requirements, unencumbered 
        Internet access to our services or access to our 
        facilities, the design and operation of websites, 
        health and sanitation standards, the characteristics, 
        legality, and quality of products and services, product 
        labeling, and the commercial operation of unmanned 
        aircraft systems. It is not clear how existing laws 
        governing issues such as property ownership, libel, 
        data protection, and personal privacy apply to the 
        Internet, e-commerce, digital content, web services, 
        and artificial intelligence technologies and services. 
        Jurisdictions may regulate consumer-to-consumer online 
        businesses, including certain aspects of our seller 
        programs. Unfavorable regulations, laws, and decisions 
        interpreting or applying those laws and regulations 
        could diminish the demand for, or availability of, our 
        products and services and increase our cost of doing 
        business. . . .

        Our contracts with U.S., as well as state, local, and 
        foreign, government entities are subject to various 
        procurement regulations and other requirements relating 
        to their formation, administration, and performance. We 
        may be subject to audits and investigations relating to 
        our Government contracts, and any violations could 
        result in various civil and criminal penalties and 
        administrative sanctions, including termination of 
        contract, refunding or suspending of payments, 
        forfeiture of profits, payment of fines, and suspension 
        or debarment from future Government business. In 
        addition, such contracts may provide for termination by 
        the Government at any time, without cause. . . .

        Some of the products we sell or manufacture may expose 
        us to product liability or food safety claims relating 
        to personal injury or illness, death, or environmental 
        or property damage, and may require product recalls or 
        other actions. Certain third parties also sell products 
        using our services and stores that may increase our 
        exposure to product liability claims, such as if these 
        sellers do not have sufficient protection from such 
        claims. Although we maintain liability insurance, we 
        cannot be certain that our coverage will be adequate 
        for liabilities actually incurred or that insurance 
        will continue to be available to us on economically 
        reasonable terms, or at all. In addition, some of our 
        agreements with our vendors and sellers do not 
        indemnify us from product liability. . . .

        The law relating to the liability of online service 
        providers is currently unsettled. In addition, 
        governmental agencies could require changes in the way 
        this business is conducted. Under our seller programs, 
        we may be unable to prevent sellers from collecting 
        payments, fraudulently or otherwise, when buyers never 
        receive the products they ordered or when the products 
        received are materially different from the sellers' 
        descriptions. We also may be unable to prevent sellers 
        in our stores or through other stores from selling 
        unlawful, counterfeit, pirated, or stolen goods, 
        selling goods in an unlawful or unethical manner, 
        violating the proprietary rights of others, or 
        otherwise violating our policies. Under our A2Z 
        Guarantee, we reimburse buyers for payments up to 
        certain limits in these situations, and as our third-
        party seller sales grow, the cost of this program will 
        increase and could negatively affect our operating 
        results. In addition, to the extent any of this occurs, 
        it could harm our business or damage our reputation and 
        we could face civil or criminal liability for unlawful 
        activities by our sellers.

    Beyond such a broad recitation of potential risks, it is 
not at all prudent to have a disclosure rule for securities 
issuers that would, with specificity, outline facts that might 
spur litigation or regulatory action. To the extent any such 
disclosures were factual and meaningful--and not simply 
recitations of general risks facing any business in a given 
industry--they might involve trade secrets or other proprietary 
information, or otherwise put businesses trading on U.S. 
exchanges at a competitive disadvantage relative to privately 
held or foreign-listed companies. To the extent a disclosure 
was not factual but speculative, it would be disfavored, as are 
speculative, forward-looking statements generally in our 
securities-disclosure regime. To the extent they involved 
actual ongoing litigation, disclosures could compromise a 
company's litigation position-and statements might be used in 
litigation as implicit admissions, even when not so intended, 
to the detriment of investing shareholders' interests.
    Of course, there may be specific regulatory-risk issues 
that are sufficiently significant and material that the SEC 
might develop a disclosure regime as consistent with its 
mandate to protect investors, maintain efficient markets, and 
facilitate capital formation. For example, in 2010, the SEC 
promulgated new climate-change disclosure rules along these 
ends. See Commission Guidance Regarding Disclosure Related to 
Climate Change, Exchange Act Release No. 34-61469, 75 FR 6290, 
6291, 6296. Whether or not the specific disclosure rules being 
promulgated were provident, this type of disclosure rule can--
at least in theory--fit within a rational disclosure regime, if 
it involves assessments of firm assets or positions that might 
be particularly vulnerable to a prospective or known regulatory 
rule of materially sizable magnitude.

Q.2. If ESG disclosures would put companies at risk of legal 
liability, isn't it better for investors to have this 
transparency to inform their future investment decisions?

A.2. No. If a disclosure as a disclosure creates a liability 
risk--because an enterprising plaintiffs' lawyer could excerpt 
the disclosure and use it to suggest a corporate admission or 
to fulfill a knowledge (scienter) requirement, whether 
warranted or not--then that is a reason NOT to require a 
disclosure. Liability risks should be predicated upon facts; 
the last thing we should want is for our Government disclosure 
regime itself to facilitate spurious class-action or other mass 
litigation claims.

Q.3. ESG funds are part of the marketplace of options where 
people can invest their hard earned money and do so with 
quality returns. Why do you propose restricting Americans' 
choices to disinvest from poorly performing companies that go 
against their own personal values?

A.3. I do not propose ``restricting Americans' choices'' to 
invest or divest their funds in accordance with their own 
social or policy values, including through institutional 
intermediaries. To the contrary, in my written testimony, I 
expressly state:

        To be sure, some investors will prefer various social-
        investing goals for their assets. . . . Nothing in my 
        comments should be taken to disparage the 
        appropriateness of such investment vehicles for 
        investors who prefer them. But recognizing that an 
        institutional fund manager's social-investing goal may 
        be appropriate for the informed investor who embraces 
        that goal does not imply that such a social-investing 
        goal is appropriate for institutional asset managers 
        that do not clearly announce to investors their social 
        purpose. And it does not imply that such a social-
        investing goal should be imported more generally into 
        our investment, securities, and corporate laws, nor 
        that such laws should enable actors pursuing such goals 
        to impose them on corporate managers.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                     FROM JAMES R. COPLAND

Q.1. Mr. Copland, you stated in your testimony that certain 
decisions that institutional investors, social-investing 
organizations, and proxy advisory firms have collectively made 
constitute ``social activism'' that ``appear to be depressing 
share value.'' What specific examples of ``social activism'' 
can you cite where a decision on a proposal has causally 
depressed share value? How does one determine that a proposal 
has causally depressed share value?

A.1. In my testimony, I claimed that ``[a]t least some 
[shareholder-based] social activism appears to be depressing 
share value.'' A 2015 study published by the Manhattan 
Institute, cited in footnote 33 [29 herein] of my long-form 
written testimony, forms the principal empirical basis for that 
claim. The study, ``Public Pension Fund Activism and Firm 
Value: An Empirical Analysis'', was conducted by Tracie 
Woidtke, Head of the Finance Department at the Haslam College 
of Business at the University of Tennessee, where she serves as 
the David E. Sharp/Home Federal Bank Professor in Banking and 
Finance. The study is available online at https://
www.manhattan-institute.org/html/public-pension-fund-activism-
and-firm-value-7871.html.
    Because many factors can influence short-term stock-price 
movements, it is difficult to infer that any single stock-price 
decline is attributable to social activism on the part of a 
shareholder. Professor Woitdke--both in our Manhattan Institute 
study and in earlier research examining different questions--
has asked the question using a different methodology. Professor 
Woidtke looks at lagged ownership data on the part of 
institutional investors engaged in shareholder-activism 
campaigns--calculated as the number of shares as a proportion 
of shares outstanding at the end of the preceding quarter. 
Using this data, Professor Woidtke conducts an econometric 
regression looking at the relationship between this 
institutional-ownership data and firm value (as measured by 
Tobin's Q, a measure of the contribution of the firm's 
intangible assets to its market value, commonly used to assess 
firm value in regression analyses of this type).
    Because large institutional investors managing more than 
$100 million in assets are required by the SEC to file Form 13F 
ownership data on their directly owned equity shares, Professor 
Woidtke was able to gather such data for a large number of 
institutional investors, including both private mutual funds 
and public pension funds. And certain of these public pension 
funds--notably the California Public Employees Retirement 
System (CalPERS), California State Teachers Retirement System 
(CalSTRS), New York State Common Retirement System (NYSCR), and 
Florida State Board of Administration (FSBA)--have over the 
years engaged in a variety of forms of shareholder activism, 
both related to social and environmental issues and related to 
more traditional corporate-governance and executive-
compensation concerns. By comparing firm value with lagged 
pension-fund ownership--and assessing whether firms with shares 
held by the public pension fund were the targets of public 
shareholder-activism campaigns, as collated on the Manhattan 
Institute's ProxyMonitor.org database of shareholder 
proposals--Professor Woidtke was able to test for an average 
associational relationship between the activism campaign and 
firm value.
    Professor Woidtke's study covers the years from 2001 
through 2013. The public pension funds studied held in the 
aggregate approximately 2.5 percent of the S&P 500 companies' 
equity. Professor Woidtke's analysis accounts for a host of 
control variables found to influence Tobin's Q in prior 
research, including industry, firm size, prior-year firm 
income, firm leverage, firm research and development expenses, 
firm advertising expenses, firm insider ownership, firm 
membership in the S&P 500 stock index, firm-specific stock 
transaction costs, and year fixed effects. She assesses both a 
Fortune 250 and an S&P 500 dataset. Because ownership was 
lagged, we can broadly reverse-causality explanations.
    Professor Woidtke's analysis concluded:

        Social-issue shareholder-proposal activism appears to 
        be negatively related to firm value. In this paper, the 
        negative relationship between public pension fund 
        ownership and firm value is significant for firms 
        targeted by public pension funds engaging in social-
        issue activism--across two different firm samples--in 
        2008-13, when the two large funds focused on social-
        issue activism, CalSTRS and the NYSCR, were engaged in 
        shareholder-proposal activism.

    Interestingly, while Professor Woidtke found that socially 
oriented shareholder activism had a negative relationship to 
firm value, she also found that ``No significant valuation 
effect is found for ownership by public pension funds that 
sponsor corporate governance proposals during any period.'' 
Thus, public pension funds that tried to engage companies in 
shareholder-activism efforts for the ``G'' portion of ESG 
advocacy did not seem to affect share price significantly 
(either positively or negatively).

Q.2. Given that share value is constantly determined by a 
variety of factors, many of which are not within a corporate 
board's direct control, how do you quantify a decision's 
commensurate reduction in share value?

A.2. Controlling for a large number of factors, the 
relationship that Professor Woidtke found was strong, vis-a-vis 
the stylized ``industry-adjusted Tobin's Q'' variable, 
particularly for companies targeted in the social-activism 
campaigns of the New York State Common Retirement Fund (the 
most-active sponsor of shareholder proposals among public-
pension funds reporting 13F ownership data):

        Consistent with social-issue activism having negative 
        valuation effects, Tobin's Q is 22 percent lower (1.42 
        vs. 1.83) and industry-adjusted Tobin's Q is 141 
        percent lower (-0.12 vs. 0.29) for companies targeted 
        by NYSCR with a social issue proposal than for other 
        companies in the Fortune 250. These results are robust 
        for companies in a larger dataset, the S&P 500, for 
        which Tobin's Q is 21 percent lower (1.59 vs. 2.02) and 
        industry-adjusted Tobin's Q is 91 percent lower (0.04 
        vs. 0.45) for companies targeted by NYSCR with a 
        social-issue proposal than for other companies.

    More than the point estimates indicated, I would focus on 
the statistical significance of the finding, robust across 
different datasets for aggregate as well as specific pension 
funds being studied:

        For S&P 500 firms, the negative relationship between 
        pension-fund ownership and firm value is significant at 
        the 1 percent level, both for ownership by all social-
        issue shareholder-proposal sponsoring pension funds and 
        for the NYSCR in particular--in the full 2001-13 period 
        and in the more recent period, but not for the earlier 
        2001-07 period, when neither CalSTRS nor NYSCR actively 
        sponsored shareholder proposals.

    That said, I would share your implicit concern about 
quantifying the share-value impact described above with 
specificity, certainly in a cost-benefit analysis framework. 
This is one study, applied for one set of investors (large 
public pension funds) across one time series (2001 through 
2013) and one set of activism campaigns.
    But that does not mean that its central findings do not 
offer an important cautionary tale. Large public pension funds 
of the sort studied in the Woidtke paper own more than $3 
trillion in stock market assets. They regularly lead socially 
oriented shareholder-proposal campaigns. See, e.g., James R. 
Copland, ``Proxy Monitor 2013 Finding 3, Special Report: Public 
Pension Fund Activism'', available at https://
www.proxymonitor.org/Forms/2013Finding3.aspx. And unlike 
private institutional investors that must compete for assets 
under management, their investment portfolios are captive 
(i.e., public employees who depend on these funds to manage 
their retirement assets cannot move their investments to 
another provider); and their institutional leadership is often 
driven by policy-related and other social concerns, see James 
R. Copland and Steven Malanga, ``Safeguarding Public-Pension 
Systems: A Governance-Based Approach'' (Manhattan Institute 
2016), available at https://www.manhattan-institute.org/html/
safeguarding-public-pension-systems-governance-based-approach-
8595.html.
    (For a discussion of how these ESG campaigns relate to such 
plans' fiduciary duties, see Max M. Schanzenbach and Robert H. 
Sitkoff, ``Reconciling Fiduciary Duty and Social Conscience: 
The Law and Economics of ESG Investing by a Trustee'', Stanford 
Law Review (forthcoming), Northwestern Law and Econ Research 
Paper No. 18-22, available at https://papers.ssrn.com/sol3/
Papers.cfm?abstract_id=3244665.)
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                        FROM JOHN STREUR

Q.1. The most recent volume of the National Climate Assessment, 
a scientific report issued by 13 Federal agencies in November 
2018, stated that climate change may cause losses of up to 10 
percent of the U.S. economy by 2100. \1\ Additionally, a 2015 
report from The Economist Intelligence Unit wrote that, of the 
world's current stock of manageable assets, the expected losses 
due to climate change are valued at $4.2 trillion by the end of 
the century. \2\
---------------------------------------------------------------------------
     \1\ New York Times, ``U.S. Climate Report Warns of Damaged 
Environment and Shrinking Economy'', Coral Davenport and Kendra Pierre-
Louis, November, 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html.
     \2\ The Economist Intelligence Unit, ``The Cost of Inaction'', 
2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
The%20cost%20of%20inaction_0.pdf.
---------------------------------------------------------------------------
    Would understanding which assets of public companies may be 
materially affected by climate change help you make more 
informed decisions about the risk of your investments?

A.1. Yes. The climate-related risk to individual corporate 
assets, overall corporate performance at the company level, and 
the wider financial system are currently poorly understood. The 
Financial Stability Board's Task Force on Climate Related 
Financial Disclosures (TCFD) has developed guidelines that 
categorize climate risk into (i) transition risk and (ii) 
physical risk. These disclosure frameworks represent positive 
developments but remain voluntary. A growing number of firms 
are making progress on disclosing transition related risks 
while far fewer have made progress on disclosing physical 
climate risk exposures.

Q.2. Would it be useful as an investor to understand public 
companies' contributions to greenhouse gas emissions and their 
exposure in the event of a Government- or market-mandated 
transition towards a lower-carbon economy?

A.2. Yes. A Government- or market-mandated transition to a low 
carbon economy would almost certainly require actions that 
would result in a direct financial impact to firms across every 
industry and therefore investors would be interested in 
understanding the nature of that particular risk exposure.

Q.3. A Government Accountability Office (GAO) report from 
February 2018 states, ``[Securities and Exchange Commission 
(SEC)] reviewers may not have access to the detailed 
information that companies use to arrive at their determination 
of whether risks, including climate-related risks, must be 
disclosed in their SEC filings.'' \3\ While the SEC has issued 
guidance for considering effects of climate change, the SEC has 
not mandated disclosures for how climate risk materially 
affects returns.
---------------------------------------------------------------------------
     \3\ United States Government Accountability Office, ``Climate-
Related Risks'', February 2018, pp. 17-18, https://www.gao.gov/assets/
700/690197.pdf.
---------------------------------------------------------------------------
    If Federal regulators do not have the information needed to 
fully understand public companies' climate-related risks under 
current law, do you as an investor have the adequate 
information needed to make informed decisions about companies' 
risks?

A.3. Many public companies do supply information related to 
risks associated with climate change on a voluntary basis. As 
an investor we find this information helpful but often 
incomplete. Because consistent disclosure is not mandated by 
Federal regulators, considerable information asymmetry exists. 
Investors that are focused on climate-related risks must 
conduct significant levels of diligence using information 
sources outside of the traditional audit and regulatory filing 
process. We would support a uniform standard for disclosing 
climate-related risks that would facilitate consistent 
comparison across issuers of securities.

Q.4. The GAO report also states, ``Climate-related disclosures 
vary in format because companies may report similar climate-
related disclosures in different sections of the annual filings 
. . . SEC reviewers and investors may find it difficult to 
navigate through the filings to identify, compare, and analyze 
the climate-related disclosures across filings, especially 
given the size of each individual filing.'' \4\ There is, 
however, a clear desire for shareholders to understand the 
impacts of climate-related risks for companies, as was shown in 
a 2017 vote of ExxonMobil shareholders calling on the company 
to report on business risks associated with new technology and 
changes in climate policy. \5\
---------------------------------------------------------------------------
     \4\ Id.
     \5\ New York Times, ``Exxon Mobil Shareholders Demand Accounting 
of Climate Change Policy Risks'', Diane Cardwell, May 31, 2018, https:/
/www.nytimes.com/2017/05/31/business/energy-environment/exxon-
shareholders-climate-change.html.
---------------------------------------------------------------------------
    Do you believe that a mandatory uniform standard for 
disclosing climate-related risks would help you better 
understand how these risks may affect returns and compare 
across companies?

A.4. If the standard is strong, the answer would be ``Yes.'' 
However, if the standard was inadequate or poor, the answer 
would be ``No.''

Q.5. In response to Senator Schatz's question of whether you 
think companies are doing an adequate job of disclosing 
material climate risk, you responded, ``It's changing, but 
we're not close to being there yet . . . Companies themselves 
understand these risks fairly well.''
    What actions are some companies taking that demonstrate 
that they're aware of climate risk?

A.5. The actions taken by firms to address climate-related risk 
can vary considerably. Some firms have taken no action. Others 
have substantially taken steps to reduce the GHG footprint of 
their operations or incorporate more sources of renewable 
energy. Still others have made efforts to capitalize on the 
opportunities associated with the transition to a lower carbon 
economy and partially or completely pivoted their corporate 
strategy. Actions vary widely and are generally unique to the 
firm and industries in which they operate.

Q.6. What companies are doing the best job of disclosing 
climate risk and what do these disclosures include?

A.6. The Carbon Disclosure Project's (CDP) annual A List should 
serve as a worthwhile reference to address this question. The 
CDP A List names the world's businesses leading on 
environmental disclosure and performance. To address the 
question of what companies Calvert views as strong performers, 
we would kindly direct you to the annual Barron's annual The 
100 Most Sustainable U.S. Companies list. The methodology for 
this ranking was developed by Calvert Research and Management. 
https://www.barrons.com/articles/these-stocks-are-winning-as-
ceos-push-for-a-sustainable-future-51549657527; https://
www.calvert.com/impact.php?post=how-we-did-it-barrons-top-100-
sustainable-companies-&sku=31313.

Q.7. How have these disclosure improvements allowed your firm 
to generate favorable investment returns for your clients?

A.7. ESG disclosures provide a more complete and transparent 
picture of company's performance relative to peers in what we 
view to be deep secular trends toward a more sustainable and 
inclusive economic system. This enables us to differentiate 
among issuers and select investments that may be better 
positioned to outperform the respective benchmark over the long 
term, all else being equal.

Q.8. In your written testimony, you wrote, ``The efficient flow 
of capital that [our financial economy] provides has enabled 
companies of all sizes to innovate, create jobs, and contribute 
to an enhanced quality of life for Americans. Yet, when it 
comes to the issue of standardizing disclosures related to ESG 
risk factors, we are behind many other developed economies 
around the globe.'' \6\ You go on to state that there are 
currently seven stock exchanges where companies are required to 
have some environmental or social disclosures and that failing 
to standardize U.S. environmental, social, and governance 
disclosures may allow other Nations to shape global standards.
---------------------------------------------------------------------------
     \6\ Written testimony of John Streur to the U.S. Senate Committee 
on Banking, Housing, and Urban Affairs, April 2, 2019, https://
www.banking.senate.gov/imo/media/doc/Streur%20Testimony%204-2-19.pdf.
---------------------------------------------------------------------------
    Would requiring uniform standards for public companies to 
disclose critical information about their environmental risks 
be an adequate step forward in modernizing U.S. disclosures?

A.8. Yes, such an action would be viewed as strong progress. 
However, any potential disclosure mandates should consider both 
the costs and benefits associated with implementation as to not 
improperly disincentivize or disrupt access to capital.
    There are currently multiple voluntary ESG related 
disclosure frameworks from sources such as SASB, GRI, CDP, and 
others. Some corporations have noted ``survey or disclosure 
fatigue.'' A single, regulatory-backed set of disclosure 
standards would likely lower the reporting burden for companies 
currently reporting this information and improve the quality of 
what is available to investors.
    Ideally, any additional disclosure requirements would be 
implemented as a part of a more comprehensive effort to 
modernize the United States' financial disclosure regime and 
ensure any potential regulatory burden on public firms is 
minimized while still ensuring we address information 
requirements related to the pertinent risks companies face in 
the 21st Century.

Q.9. What countries have the best disclosure frameworks? What 
makes them so useful?

A.9. The European Union has led on critical issues of ESG 
disclosure and performance. Please see release below from 
earlier this year for reference. https://www.unepfi.org/news/
industries/investment/eu-policy-makers-achieve-political-
agreement-on-investor-disclosures-and-esg/
    Please also reference various examples I shared in my 
testimony. The PRI has provided a Global Guide to Responsible 
Investment Regulation, which identified 300 policy initiatives 
that promoted sustainable finance in 50 of the largest 
economies around the globe. Two hundred of those initiatives 
were corporate reporting requirements covering ESG factors. 
https://www.unpri.org/sustainable-markets/global-guide-to-
responsible-investment-regulation/207.article
    Additionally, there are now seven stock exchanges--in 
Australia, Brazil, India, Malaysia, Norway, South Africa, and 
the United Kingdom--where companies must have some degree of 
environmental or social disclosure in order to meet the 
exchanges' requirements to list. While we do not believe China 
has best-in-class policies on ESG related exposure, in 2018 the 
China Securities Regulatory Commission did introduce 
requirements that will mandate all listed companies and bond 
issuers in China disclose environmental, social, and governance 
risks associated with their operations.
    As we noted previously in this response, the financial 
economy of the United States has different characteristics than 
that of the European Union and other countries we have 
mentioned (i.e., mix of financing provided through capital 
markets versus the banking system). The U.S. will need to 
determine what disclosure regime is most optimal for its 
market. A regulatory backed disclosure framework that requires 
companies to quantitatively report the impact of only those ESG 
matters that are financially material to the industry in which 
the company does business would represent significant progress 
in this regard.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR CORTEZ MASTO FROM JOHN STREUR

Q.1. What would you say is the average length of an investor 
relationship at Calvert? In your opinion, are most asset 
managers and pension funds interested in short-term profit or 
long-term gain?

A.1. Historically, the average length of an investor 
relationship with Calvert is over 12 years. We believe this is 
longer than investor relationships seen in other mutual funds. 
Many asset managers do attempt to apply a long-term strategic 
focus to investing. However, we feel that short-term thinking 
is prevalent in our financial markets. This is reflected in 
corporate sentiment, investor holding period data, and other 
market and human behavioral incentives that all contribute to 
short-term pressures that both asset managers and companies 
face.

Q.2. Would you agree that someone who invests their retirement 
savings in an index fund is the ultimate long-term investor? 
And if so, do you think it is the fiduciary duty of the manager 
of that index fund to ensure that that investor's assets are 
profitable over the long term and are not impacted by factors 
like climate change?

A.2. Investors investing their retirement savings will have 
different investment horizons based upon their time to 
retirement, but it is likely that a significant percentage of 
those investors are planning to invest for the long term. Index 
funds managers are obligated to implement the index as created 
by the index provider. It would be the obligation of the 
fiduciary to a retirement plan to assure that the options 
available in the plan are appropriate investment options for 
plan participants.

Q.3. Would you have concerns if Congress made it more difficult 
for proxy advisors to provide advice to your firm?

A.3. Yes. As I stated in my testimony, we believe proxy 
advisors serve a valuable role in providing research services 
to the investment industry. Ultimately, we would not favor any 
additional actions that would compromise the independence of 
the research and advice we receive from these vendors or impose 
unnecessary costs or burdens on investment firms.

Q.4. Do you think ESG funds are being accurately and fairly 
marketed to investors?

A.4. As it pertains specifically to marketing efforts by asset 
managers, both regulators and FINRA have rules and have issued 
guidance related to the marketing of funds. If funds are 
subjected to standardized criteria for disclosing their ESG 
strategies, the result would be enhanced consistency and 
transparency in marketing ESG funds.
    More broadly, we feel that there is a much greater 
opportunity for the marketplace to define what ``ESG'' is and 
what it means exactly from an investment perspective. As a 
result of this void, the ESG label is often used across a wide 
variety of strategies that range from simply considering ESG 
factors to fully optimizing to seek positive impact. The 
marketplace would certainly benefit from a more detailed 
taxonomy that is generally accepted. Clear, required 
disclosures for issuers of securities would likely assist in 
the development of broader clarification in the marketplace but 
any additional disclosure mandates for issuers should consider 
both the costs and benefits associated with implementation. 
Morningstar's Jon Hale provided a worthwhile analysis of this 
issue in the February 2019 report, Sustainable Funds U.S. 
Landscape Report. https://www.morningstar.com/lp/sustainable-
funds-landscape-report.

Q.5. Is there a Federal role for protecting consumers by 
ensuring standards, consistency, and transparency in the 
marketing of ESG funds?

A.5. Yes. Both Federal and State regulators should act within 
their existing authorities as outlined by any relevant 
mandates. We believe that Federal regulatory disclosure 
guidelines that provide standards, consistency, and 
transparency for issuers of securities on ESG considerations 
would be helpful to the marketplace.

Q.6. What role does the nonprofit Sustainability Accounting 
Standards Board have in ensuring investors looking for 
financial investments that align with their values are 
appropriately served?

A.6. The Sustainability Accounting Standards Board (SASB) is an 
independent standards board that is accountable for the due 
process, outcomes, and ratification of the SASB standards. The 
SASB disclosure standards are an important tool for issuers of 
securities as they provide a standardized framework at the 
industry level that assists interested investors in allocating 
capital in a manner that aligns with their values.

Q.7. Are you concerned that the Board's standards are only 
voluntary?

A.7. Calvert is concerned that there continues to be a lack of 
Federal regulatory guidance on disclosures related to 
environmental, social, and governance issues. We view this as a 
competitive disadvantage for U.S. capital markets. It is 
concerning that there remains a lack of clarity on the path 
forward for regulatory disclosure standards in the United 
States while other Nations move forward in an effort to 
modernize their financial markets.

Q.8. ESG fund offerings continue to increase; in fact they will 
become more and more mainstream. Who do you see fighting this 
inevitability and why do you believe they are fighting it?

A.8. We believe the growth in this form of investment 
management is indicative of, and directly commensurate to, the 
value that ESG information brings to investors and our economic 
system broadly. However, there are political constituencies and 
entrenched corporate interests that have business models, fixed 
asset bases, and financial outcomes that are not aligned with 
the transition to a more environmentally sustainable and 
inclusive economic system. For some, alignment with this 
secular economic shift will inherently require significant 
investment and adaption efforts. Constituencies and companies 
that find themselves misaligned with this secular pivot and 
unable to adapt accordingly will be most antagonistic to the 
growth of ESG investing.

Q.9. Who decides what is financial material? Is investor 
interest enough to justify the need for consistent, comparable, 
and complete ESG information?

A.9. Financial materiality has been addressed by both 
regulatory authorities and independent standard setting bodies. 
Generally, we view a financially material issue as one that is 
reasonably likely to impact the financial condition or 
operating performance of a company and therefore it is 
important to investors. If a reasonable investor could have 
come to a different investment decision as a result of the 
incorporation of certain information it is considered 
financially material.
              Additional Material Supplied for the Record
         LETTER SUBMITTED BY COUNCIL OF INSTITUTIONAL INVESTORS
         
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     LETTERS SUBMITTED BY THE NATIONAL ASSOCIATION OF MANUFACTURERS
     
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          LETTER SUBMITTED BY SOCIETY FOR CORPORATE GOVERNANCE
          
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    REVISED AND EXTENDED REMARKS AT THE GREENWICH ROUNDTABLE PANEL 
  DISCUSSION ON ESG: PATH TO PROSPERITY OR PHILANTHROPIC CONFUSION BY 
                BARBARA NOVICK, VICE CHAIRMAN, BLACKROCK
                
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  ``BLACKROCK ANALYSIS HELPS DEFINE CLIMATE-CHANGE RISK'', FINANCIAL 
                TIMES SUBMITTED BY SENATOR SHERROD BROWN
                
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STATEMENT SUBMITTED BY JANA MORGAN, DIRECTOR OF CAMPAIGNS AND ADVOCACY, 
           INTERNATIONAL CORPORATE ACCOUNTABILITY ROUNDTABLE
           
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                   LETTER SUBMITTED BY PUBLIC CITIZEN
                   
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