Shedding Light on the True Catalysts of the ESG Agenda
Over recent years, environmental, social, and governance (ESG) policies have grown into a cause célèbre. What once ostensibly began with good intentions, ESG platforms too often have morphed into political doctrine—an ideological tail wagging the interests of free enterprise and everyday consumers and investors.
It is clear that ESG is now a complete echo of the far-left’s progressive environmental and social agenda. But far from even offering a choice, ESG policies are superseding sound financial strategies, which hurts everyday Americans’ financial security. The problem has become so pervasive that Republican lawmakers launched a series of ESG hearings – dubbing July ‘ESG Month’ – investigating ESG policies’ creep into the regulatory system.
These inquiries, including a committee hearing this past Wednesday, highlight an important truth—ESG’s prominence is driven more by proxy advisory firms and their fidelity to political dogma than by corporations themselves.
A House interim report released late last month calls attention to this reality. “The outsized influence of proxy advisory firms on the proxy voting system is a growing concern,” the report states. “[T]hese firms have the power to sway institutional investors’ voting decisions. This level of influence undermines the fairness and transparency that underpins corporate governance.”
On Wall Street, the “Big Three” asset managers—BlackRock, Vanguard, and State Street—have regularly been targeted for perceived ESG-driven investing. Yet, the antagonists of this movement are two dominant proxy advisory firms: Institutional Shareholder Services (ISS) and Glass Lewis. These two firms control 97 percent of the proxy advisory market and yet somehow have largely avoided public scrutiny.
Proxy advisory firms are paid to counsel publicly traded businesses how to guide shareholders’ votes on important issues. In other words, these companies advise investors on how to advise their stakeholders. These firms are well positioned to push an ideological agenda, especially when only a select few command the lion’s share of the market.
Ben Zycher, a Senior Fellow at the American Enterprise Institute, testified during Wednesday’s ESG House Financial Services Committee hearing about the outsized role – and attention – proxy advisory firms deserve, explaining that “regulatory actions by the Securities and Exchange Commission have created a duopoly … and powerful incentives for firms and funds to retain proxy advisers and to adopt their recommendations, often on an automatic basis. The advisers themselves have weak incentives to consider the fiduciary interests of shareholders and fund participants, thus freeing them to indulge their own political preferences, at little or no cost to themselves.”
While BlackRock, Vanguard, and State Street have been made the scapegoat of ESG investing—with several states having considered legislation to blacklist the asset managers for not sufficiently supporting traditional energy—an analysis by ShareAction found these asset managers in fact voted more conservatively than ISS’ and Glass Lewis’ recommendations on a consistent basis.
ISS recommended voting in favor of ESG resolutions 75 percent of the time and Glass Lewis did so 41 percent of the time. By contrast, State Street, BlackRock, and Vanguard voted in agreement only 29 percent, 24 percent, and nine percent, respectively.
No doubt the reason for that divergence is due to asset managers’ accountability to their shareholders and their commitment to providing the best possible risk-adjusted returns. Any financial firm worth its salt must be focused on maximizing investors’ returns, not advancing a political cause.
Put another way, investors win business by growing their clients’ money, regardless of how that might align with purportedly high-minded political causes. The same cannot be said of proxy advisory firms, who are more concerned with optics than dollars and cents or any obligation to maximizing returns for American retirees through the proxy votes they cast on behalf of millions of retirees who actually own shares in countless public companies.
Therein lies an important distinction. There are “conscious” investments that optimize shareholders’ value. Asset managers shouldn’t be punished for pursuing those. In fact, they would be foolish not to. That is the brilliance of free markets—they are extremely good judges of opportunity, risk, and reward.
Lawmakers’ scrutiny of proxy advisory firms is timely and appropriately focused. These firms’ allegiance, unlike the corporations they inform, is to environmental and social activists, not everyday investors. It might be unfair to say they themselves are proxies to those pushing these ideological ends, but certainly they are more attuned to such political zephyrs than to consumers’ wellbeing.
The countermovement against ESG investing is not misguided. Hard-working Americans ought to have confidence that their investments are steered by prudent strategy and management, not someone else’s agenda. Yet, to penalize asset managers for perceived wrongs against certain industries is to throw the baby out with the bathwater, which ultimately hurts consumers. Washington may finally be on a much-needed course correction by examining the true culprits: proxy advisory firms and the largely clandestine way in which they influence firms’ investing decisions.
Mario H. Lopez is the President of Hispanic Leadership Fund
