“Woke finance” is likely to take center stage in the next Congress as Republican lawmakers look for ways to curb actions by asset management firms that use investors’ voting shares to force companies to adopt so-called environmental, social, and governance goals, known as ESG. 

The popularity of large investment firms such as BlackRock, Vanguard, and State Street Global Investment Advisors has exploded over the past two decades, and as a result the firms have gained a considerable foothold in publicly traded companies. 

Republicans say they are using that power in undemocratic ways. The concern is that these investment firms are using it to, say, force banks to stop lending to fossil fuel companies in the name of combatting climate change or to adjust the racial makeup of their boards of directors to address concerns about racial diversity. 

“The Big Three’s unprecedented stakes in America’s largest companies might not be objectionable if they were truly passive. The Big Three, however, are anything but,” a minority report from the Senate Committee on Banking, Housing, and Urban Affairs released on Tuesday reads.

The three firms manage more than $20 trillion in investments, and cast about 25 percent of all votes at annual meetings. The firms are among the largest owners of 90 percent of the companies that make up the S&P 500.

Because the Big Three are passive investors, they are not required to file extensive disclosures to the Securities and Exchange Commission. Likewise, though they own considerable stakes in banks, they are not classified as bank holding companies, which have much stricter federal regulatory obligations.

“On the pretext of ‘investment stewardship,’ each of the Big Three strategically votes on directors and shareholder proposals, often with an aim of driving change. Regardless of whether these changes are ultimately good or bad, these campaigns are inconsistent with a passive investment strategy,” the report reads.

“There is nothing wrong with activist investing — buying shares in companies with the purpose of changing the way they do business,” the minority report reads. “But doing so with publicly traded companies carries with it legal obligations to inform the investing public about one’s plans when they are a significant shareholder.” 

Two red states have already taken action to divest themselves from companies pushing ESGs. Florida’s chief financial officer announced last week that the state is pulling $2 billion worth of assets managed by BlackRock. In 2021, Governor Abbott of Texas signed a law banning financial companies from doing business with the state if their ESG policies “discriminate” against the oil and gas sector.  

Thirteen Republicans, led by Senator Sullivan of Alaska, introduced legislation to require asset managers like BlackRock to get proxies from fund investors with instructions on how to vote in shareholder meetings. The legislation could be reintroduced next session.

“Asset advisers are not truly invested in the governance or success of the hundreds or thousands of portfolio companies. This ability to consolidate and vote millions of voting shares has taken the power from individual investors and permanently distorted the corporate governance ecosystem,” Mr. Sullivan said.

Although Senate Democrats have expressed support for ESG regulation, some are conflicted over the massive accumulation of wealth being managed by just a few hands in the private sector. Financial Services and Banking Committee members may be able to find agreement on oversight of these firms.

BlackRock announced several weeks ago that it will increase the opportunities for investors to cast their own votes. Currently 25 percent of assets held by clients have been enrolled in a “Voting Choice” option. 

“It’s clear there are investors who don’t want to sit on the sidelines; they have a view on corporate governance, and they want a meaningful way to express those views,” the BlackRock CEO, Larry Fink, wrote in a letter to investors.

Speaking at a New York Times forum last week, however, Mr. Fink bewailed investors who would squander such opportunity.

“If we could get some law changes and bring back the vote to the individual holders and all that … that will lead to some outcomes that may not be good maybe,” he said. “I truly hope that they take the responsibility to understand each vote and be a fiduciary to all their school teachers and firemen and all the other people they’re doing this for.”