Debate about the impact of environmental, social, and governance (ESG) investments on state pension funds continues across the country. After legislative hearings at both the state and federal levels, and the implementation and repeal of various bills, it has become abundantly clear that state legislators are creating a double standard for investing.
This week, the Texas State Senate held a State Affairs Committee hearing about the interim charges regarding ‘responsible investing’. The discussion centered on the role of asset managers and failed to highlight proxy advisors, who HLF’s president called the “true catalysts of the ESG agenda.”
2024 numbers regarding asset manager support for environmental and social proposals are telling. State Street, which had supported 46% of ESG shareholder resolutions since 2022, dropped its support to just 22% in 2024. BlackRock supported a mere 12%, and Vanguard, impressively, supported none.
Clearly major asset managers’ proxy voting is no longer propelling the ESG agenda. Proxy advisors, on the other hand, have advised in favor of ESG proposals at much higher rates. In 2023, Glass Lewis favored almost 40% of such proposals, while Institutional Shareholder Services (ISS) voted in favor nearly 80% of the time. These firms have stayed consistently above the average and have heavily influenced our financial systems to favor ESG investment initiatives.
These two firms control over 90% of the proxy advisory market. The duopoly both provides voting recommendations for shareholder votes and their consulting arms subsequently helps firms implement those same initiatives. This is a clear conflict of interest and a driver force behind ESG agendas. Despite this, proxy advisory firms have not faced nearly the same level of scrutiny as asset managers.
The double standard a disservice to investors, especially lower-level investors who rely on pension funds. Political agendas of any sort being pushed on pensions put individual gains at risk by preventing properly functioning—that is, free and open—markets.
Policymakers have been turning up the heat on proxy advisors. In September, the House of Representatives Financial Services Committee held a hearing titled “The Fall of ESG: Scrutinizing the Failed Use of Environmental, Social, & Governance Standards and the Influence of Proxy Advisors.” Charles Crain, the vice president of domestic policy at the National Association of Manufacturers, noted that “proxy firms are powerful, unaccountable actors that pose a real threat to Americans’ financial security.”
In contrast, this week’s hearing in Texas lacked any real focus on the role of proxy firms. Texas has previously led on these issues and should do so again. If the state wants to reduce taxpayer costs and ensure a more secure financial future for its pensioners and retirees, it should pay proper attention to the proxy advisory firms who have all too often avoided scrutiny.
