The investment industry is pressing the importance of environmental, social and governance considerations in U.S. financial markets ahead of an expected pushback from Republicans as they take control of the House.

Firms and funds with acute interest in ESG are adamant that issues such as climate change and human capital management are financially material, albeit non-traditional, issues. The fight against ESG may even add to the growing body of evidence that such factors are critical to investors, according to some.

“The fact that we’ve seen growing regulation and political discord on ESG is, to us, a sign of progress,” said Jose Minaya, CEO of investment management firm Nuveen, and Amy O’Brien, Nuveen’s global head of responsible investing. 

“Markets grow when a necessity for greater consistency and clarity becomes evident, and in 2022 we saw new technology and innovative business approaches surface to address emerging realities, as well as systemic social and environmental issues such as financial inclusion and climate change,” they said in a report on Nuveen’s investment stewardship published last month.

ESG breakthroughs last year included a surge in shareholder proposals meant to pressure corporations to do better on climate, diversity and similar topics. Meanwhile, the Securities and Exchange Commission unveiled a slew of guidance and rule proposals to improve disclosures and add clarity to ESG investing, including the agency’s controversial proposal for climate risk disclosure.

Supporters see these and other developments as demonstrating that ESG is reaching critical mass.

“Engaging with companies and clients is crucial in influencing the net zero trajectory and biodiversity loss,” Marco Morelli, executive chairman of AXA Investment Managers, said in a note to clients. “Our stewardship activities — engaging with businesses and voting at company AGMs — as well as our decisions to consciously channel capital into innovations and sustainable solutions, are effective ways for us to assert our influence to help accelerate the transition.”

The investing community also saw a significant rise in criticism, including arguments from congressional Republicans that ESG factors are largely inappropriate considerations in financial decisions. 

That has prompted a response from asset managers, institutional investors and pension funds that align with the goals of ESG reporting.

“There is enough empirical evidence to support that focus by companies on relevant, financially material environmental and social aspects of their business, along with good governance practices, can not only limit downside risks, but also lead to improved financial performance,” said Mitali Prasad, a portfolio manager for Trillium Asset Management.

During the investment firm’s presentation on its 2023 outlook, Prasad said companies have more to gain by adopting ESG practices and aligning their business goals with sustainability as countries. including the U.S., face down markets and uncertain political environments.

“For us, I believe the importance of ESG is innovative and we’re convinced more than ever in the importance of integration of financial and ESG issues into our investment decisions. ESG products are increasingly being challenged in the U.S.,” she said.

Nuveen’s Minaya and O’Brien noted the areas that policymakers need to work through, such as reporting expectations, the wide range of data and analysis that can be used, and conflicting regulation. 

“Yet, in the face of this shifting environment, we have remained true to our strongly held convictions: ESG data can be an important, financially material component of the investment process,” they said. They stressed that monitoring portfolios for ESG issues, actively engaging with companies on those issues and setting expectations for best practices are all in the best interests of clients.

“Strong management of ESG issues can mitigate risks and create long-term, sustainable value,” they added.

Materiality will be a top subject in House Republicans’ legislative agenda as well as eventual oversight hearings and congressional inquiries scrutinizing the ESG investing movement, said Rep. Bill Huizenga, R-Mich., who sits on the House Financial Services Committee. 

Huizenga introduced a bill last Congress that would make it more difficult for the SEC to require additional disclosures, as he and other Republicans crusade against the agency’s lengthy rulemaking agenda. 

Huizenga’s legislation, which would have to be reintroduced in this Congress, would amend securities laws to limit the SEC’s disclosure requirements to only information that is material to investors.

“Going back to some of the earliest financial regulations that we had, materiality has always been that watch word,” Huizenga said during a fireside chat hosted by the Bipartisan Policy Institute.

With Patrick T. McHenry of North Carolina expected to lead the committee this year, Republicans are going to be “responding robustly” to ESG concerns, Huizenga said. He argued that SEC Chair Gary Gensler and Democrats are attempting to stray away from a long-accepted definition of materiality, prompting the need for congressional action.

“When it comes to investing, the materiality question is very relevant based on your investments and how you’re investing,” Huizenga said. “And that really should reign supreme.”