Economy and Society: Shareholder activist group alleges SEC bias in allowing companies to reject its shareholder proposals

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

Shareholder activist group alleges SEC bias in allowing companies to reject its shareholder proposals

In a press release on October 1, the National Center for Public Policy Research’s Free Enterprise Project, which describes itself as the only full-time shareholder activist organization working to keep politics out of capital markets, alleged that its opposition to ESG has made it a political target of the Securities and Exchange Commission. 

When a shareholder proposal is submitted, the company to whom it is submitted may accept the proposal and fight it during proxy season. They may choose to negotiate with the activist shareholders who submitted the proposal, in order to keep it off the proxy ballot altogether. Or they can request that the SEC reject the proposal as immaterial. These decisions are made by SEC lawyers and not the commissioners. FEP accused those SEC lawyers of unfairly and illegitimately targeting their proposals for rejection, thereby politicizing the SEC:

“It would appear that the National Center’s Free Enterprise Project (FEP) is encountering similar bias at the U.S. Securities and Exchange Commission (SEC) as Tea Party groups experienced from the Internal Revenue Service during the Obama Administration.

In the Biden era, the SEC has always sided with companies seeking to reject shareholder proposals filed by FEP. This is a dramatic change from past behavior, when the government agency sided with FEP on approximately half of the attempts by companies to leave proposals off their proxy statements….

Until recently, according to Fox Business, approximately half of the shareholder proposals FEP filed were rejected, and the SEC sided with FEP in “no action” challenges around half the time. But since President Biden entered office, the SEC has ruled against FEP every time.

“I guarantee you that, somewhere in the SEC’s posh D.C. headquarters, there is a letter directing staff to blacklist our proposals,” said National Center Executive Vice President Justin Danhof, Esq.

This would be reminiscent of the IRS’s treatment of Tea Party groups. In 2017, that agency admitted that Tea Party and other conservative groups received extraordinary scrutiny during the Obama Administration because of their political beliefs.

One example of the suspicious circumstances surrounding FEP’s proposals is a rejection challenge by AT&T. The FEP proposal asked for an annual report “listing and analyzing” the previous year’s corporate charitable contributions. Despite the SEC defending a similar proposal in the past when Wells Fargo tried to reject it, and noting that such contributions are “beyond a company’s business operations,” the Biden SEC still sided with AT&T and allowed it to reject the FEP proposal.

“All of [FEP’s proposals] were good proposals,” Justin explained, “meaning we had prior precedent that the SEC had allowed very similar language in the past.””

On Wall Street and in the private sector

BlackRock scores, predicts ‘vast reallocation’ into ESG

As noted in the previous edition of this newsletter, on September 15, the Wall Street Journal took a look at the winners (so-far) in the ESG investing trend and came to the following conclusion: the biggest thus far is the biggest firm in the world, BlackRock.

If the trend continues, and if ESG reallocations continue to favor the biggest firms, then BlackRock shareholders can expect, what Philipp Hildebrand, the vice chairman of BlackRock, predicted this week will be a ‘vast reallocation’ into ESG:

“Global capital markets are about to witness a seismic shift of capital into products that promise to support environmental, social and governance goals, according to Philipp Hildebrand, the vice chairman of BlackRock Inc.

“The long-term story is clear,” Hildebrand said in an interview on Friday with Bloomberg Television’s Francine Lacqua. “We’re going to continue to see a vast reallocation of capital toward sustainable products.”…

BlackRock, the world’s largest asset manager with $9.5 trillion in client money, plans to expand its range of ESG products, Hildebrand said. The firm is already the biggest provider of ESG exchange-traded funds as investors increasingly look for cheaper, passive strategies within sustainability….

“Our job as an asset manager is to increase the scope of our product offering, ensure that it’s transparent and continue to innovate together with the index providers to make sure we can offer more choices,” Hildebrand said.”

ESG and private equity

In the midst of the confusion surrounding ESG disclosures by publicly traded companies and the plethora of standards offered for asset managers, a handful of private equity investment managers have banded together to set standards for their segment of the financial services business. According to Reuters, this is the first attempt by private equity investors to broach the subject of ESG reporting standards:

“A group of global private equity firms and pensions funds managing over $4 trillion in assets said on Thursday they have agreed to standardize reporting on environmental, social and corporate governance (ESG) performance of portfolio companies.

The group, led by Carlyle Group (CG.O) and the California Public Employees’ Retirement System (CalPERS), will track data on greenhouse gas emissions, renewable energy, board diversity and other metrics of companies in their portfolio….

“We have found it challenging to effectively measure impact in our private equity portfolio because of the multitude of frameworks and definitions used,” said Marcie Frost, chief executive officer of CalPERS, which is the largest U.S. public pension fund.

The investor group also includes Canada Pension Plan Investment Board (CPPIB), Blackstone Inc (BX.N), Sweden’s EQT AB (EQTAB.ST), Permira and CVC Capital Partners.

Under the initiative, private equity firms will gather and report ESG metrics from their portfolio companies, starting from this year. Boston Consulting Group, a consulting firm, will aggregate the data into an anonymized benchmark.

The founding group plans to meet on an annual basis to assess prior year’s data and build on initial metrics, the statement said.”

In the spotlight

ESG whistleblower joins Bloomberg New Economy Conversations panel

Former CIO for sustainable investing at BlackRock, Tariq Fancy, who has argued that ESG is a placebo and a distraction, recently appeared on an ESG panel discussing and debating the merits of the investment trend with others who appear mildly skeptical of ESG narratives. Andrew Browne, the editorial director of the Bloomberg New Economy Forum, told the tale as follows:

“Fancy’s argument draws on a sports metaphor. Wall Street is focused on scoring points (maximizing profits) not good sportsmanship (being a responsible investor.) To save the planet, you have to change the rules of the game. Ultimately, that means forcing companies to alter their ways by taxing their carbon emissions.

Fancy, a Canadian born to parents who emigrated from Kenya, turned whistle-blower to spark public debate. In that spirit, I invited him to join a panel on this week’s edition of Bloomberg New Economy Conversations along with Anne Simpson, the director for Board Governance & Sustainability at CalPERS, the California Public Employees System. Also on the show was Noel Quinn, the Group Chief Executive of HSBC.

The funds that Simpson represents are anything but trivial: close to $500 billion in CalPERS, and another $55 trillion (with a “t”) as part of a group that CalPERS helped form called Climate Action 100+, which describes itself as “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”

This financial firepower is highly directed. Fewer than 100 companies in CalPERS equity portfolio account for more than 80% of all its emissions. Simpson’s goal is to hold the boards of these companies—steel and cement makers, utilities, aviation companies and so on—accountable. One approach: force them to align executive compensation with “net zero” goals.

Like Fancy, Simpson is skeptical of the green marketing pitch fueling the rise of ESG funds. “Snake oil is as old as the hills,” she said. But Simpson takes issue with Fancy’s contention that government alone must drive change. In her view, regulators should set standards for corporate disclosure on climate change risk but a “partnership between public, private and civil society is what’s needed to get us over the line.”…

Yet Fancy’s insider revelations have drawn much-needed attention to industry abuses. His accusations of greenwashing are backed by academic research.

A recent report by EDHEC, one of Europe’s top business schools, found that climate factors represent at most 12% of ESG portfolio stock weights on average. To boost their “green scores,” funds simply underweight sectors like electricity, which does nothing to greenify the economy. Bizarrely, the report finds that ESG funds “favor companies whose climate performance deteriorates over time.”

“From everything I saw,” Fancy said of his time running ESG investing, “being irresponsible is actually profitable, right?” He added that “most of what we were doing wasn’t really creating any systemic change as much as lulling a fantasy that was delaying the action by government required to create that.””