ESG cheerleaders are suddenly pivoting and and running for cover
The more the dirty little secrets about environmental, social and governance (ESG) investment schemes are revealed, the faster even its most strident proponents run away from it. BlackRock CEO Larry Fink, the poster CEO for ESG investing, recently said he’ll no longer be using the term "ESG" and that he's "ashamed" to be part of the debate on the issue.
There should be little wonder that those involved with the nefarious ESG scheme are running for cover. The influential German-owned proxy advisory firm ISS appears to be the latest to distance itself from ESG.
With the assistance of ISS, investment firm giants such as BlackRock, StateStreet and Vanguard have been leveraging their massive investment portfolios — which include state pension funds and hardworking Americans’ retirement nest eggs – to force companies to advance radical political goals.
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It’s certainly egregious that these firms are using their investors’ assets – without the investors’ knowledge or consent – to pursue an activist ESG agenda with which many of those investors vehemently disagree. But it’s even more important that these ESG investing schemes diminish returns for state pension and retirement funds, and that crosses a line, compelling state treasurers and financial officers to step in and exercise their fiduciary responsibilities.
Several state treasurers and financial officers have been examining the role of proxy-advisory services in the context of shareholder proposals that in recent years have been dominated by ESG items, some of which appear to be ideological efforts to undermine companies at their very foundations, reducing profits and investors’ returns.
It would be an understatement to say that proxy-advisory firms such as ISS and its main competitor Glass Lewis have an outsized influence over how thousands of their corporate clients vote on shareholder proposals.
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Combined, ISS and Glass Lewis control 97% of all proxy advisory business. In the 2020 proxy season alone, 114 institutional investors with over $5 trillion in assets under management voted in line with ISS and Glass Lewis guidance on 99.5% or more of proposals. Such profound influence upon the outcomes of millions of votes at public companies directly impacts the financial well-being of millions of retail investors over time—including the taxpayers and pension beneficiaries who rely on elected state financial officials to safeguard their public funds.
In a recent joint letter to proxy-advisory services, 22 state treasurers and financial officers representing 19 states expressed concern over proxy advisors’ secretive vote recommendations and the effects of those "influential recommendations, in whole or in part, on factors other than enhancing or protecting shareholder value." Enclosed with the letter was a questionnaire designed to help shed light on the process.
BlackRock CEO Larry Fink reportedly argued the term ESG was being "misused by the far left and far right." (REUTERS/Brendan McDermid)
A response from ISS bears close scrutiny. "You might also be interested to know that in 2022, a record year in terms of the number of environmental and social shareholder resolutions on the ballots of S&P 500 constituents, ISS’ benchmark policy supported just 52 percent of all such shareholder proposals while supporting more than 96 percent of all management resolutions. That is hardly the track record of an advocacy organization ‘pushing political agendas.’"
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Despite the claims in the letter that they remain independent and neutral in their offerings, ISS is not an independent company. Conspicuously absent from the letter is any mention that ISS is majority owned by Frankfurt-based Deutsche Börse AG, a firm that makes no claims of being objective. "We at Deutsche Börse are not only committed to supporting the sustainable transformation of our economy with the constant development of our ESG offerings. Reaching net zero climate neutrality by 2025 – 25 years ahead of the official target of the European Union – shows that sustainability is also part of our DNA as a company as we ambitiously lead the way."
"The quality, precision and breadth of ISS’ data and research is unique in the market. Especially the company’s ESG expertise and data capabilities are highly complementary to Deutsche Börse’s businesses along the entire value chain," remarked Deutsche Börse executive board member Stephan Leithner in a 2021 press release. "The acquisition of ISS is a further demonstration of Deutsche Börse’s commitment to ESG."
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Obviously, ISS has a glaring conflict of interest related to their German ownership. Specifically, when purchased a couple years ago, Deutsche Börse said that it wanted to gain access to ISS’s client base -- and their business is selling ESG related products which, according to Leithner, is a $1 billion per year market. What remains unclear is how its German owner’s prioritization of ESG squares with ISS’ voting recommendations.
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The more that becomes known about ESG, the angrier investors become.
It’s no surprise that ISS apparently wishes to obfuscate and resist transparency on the matter. It’s also no surprise that state financial officers are shining – and will continue to shine – a light on ISS’s ESG voting trends.
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