Once again, several of the largest financial asset managers in the world—BlackRock, State Street and Vanguard—have become the focus of a Congressional Committee looking at the impact of so-called ESG investing. These three firms have been subpoenaed by the U.S. House of Representatives’ Judiciary Committee in its ongoing investigation of firms’ “promotion of environmental, social and governance (ESG) goals.”
ESG criteria has been in the spotlight for several reasons. Republicans accuse asset management firms of using ESG to foist a political agenda upon pension systems, companies, and Americans in general. At the same time, Democrats accuse asset managers of accelerating climate change through their continued investments in fossil fuel companies. Two facts are often overlooked in this politicized discourse: asset managers prioritize return on investment, and the real facilitators of the ‘ESG ideology’ are actually shadowy proxy advisory firms.
Glass Lewis and Institutional Shareholder Services (ISS) are the two largest of these lesser-known firms that effectively enjoy a duopoly over the proxy advisory industry— controlling approximately 97 percent of the market. These firms provide proxy-vote recommendations for asset managers, pension systems, school endowments and more. With that amount of control, Glass Lewis and ISS act as quasi regulators. Although research has shown this duopoly can swing proxy votes as much as 30 percent, politicians still overwhelmingly blame the underlying asset managers for the rise of ESG activism, while Glass Lewis and ISS are the ones cementing the criteria.
In what appears to be a response to the significant public backlash, asset managers have begun backtracking from ESG. According to a report from shareholder advocacy group ShareAction, ISS recommended voting in favor of ESG resolutions 75 percent of the time, and Glass Lewis recommended it 41 percent of the time. The ‘Big Three’ asset managers’ recent ESG resolutions voting history is a sharp contrast. State Street, BlackRock and Vanguard voted in favor of ESG resolutions only 29, 24, and 9 percent of the time, respectively.
Thankfully, Glass Lewis and ISS were also questioned by Republicans earlier this year. They staunchly defended their corporate voting recommendations on ESG matters, saying they “remain focused on long-term shareholder value.” However, it is concerning that the inquiries seems to have stopped there.
While politicians continue to focus their ire on asset managers, the true catalysts of the ESG agenda are the proxy advisory firms. Glass Lewis and ISS should be shown the same level of scrutiny as the bigger and more well-known financial services firms have been enduring – if not more. Until then, ESG will continue to be an issue that affects everyday Americans; investment opportunities.
