Economy and Society: July 19, 2022- Missouri Treasurer challenges ESG impact on public pensions

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.

The SEC undoes Trump administration rules on proxy advisory services

On July 13, the Securities and Exchange Commission (SEC) voted to undo rules placed on proxy advisory services during the Trump administration. The advisory services – and especially the two dominant services, Institutional Shareholder Services (ISS) and Glass-Lewis – have long been considered among the key players in the ESG universe. The SEC agreed with the advisory services that the rules were, in their view, unduly burdensome and inhibited their ability to act independently. Reuters reported as follows:

“The U.S. securities regulator voted on Wednesday to rescind rules introduced under former President Donald Trump that critics said impeded the independence of firms that advise investors on how to vote in corporate elections.

The move is the latest installment in a long-running battle over how to regulate proxy advisers like Institutional Shareholder Services and Glass Lewis, which advise investors how to cast their ballot on issues including the election of directors, merger transactions and shareholder proposals….

In 2020, the SEC introduced rules that increased proxy advisers’ legal liability and required them to share recommendations early on with corporate executives. Investor advocates said the changes tilted the scales in favor of corporate bosses over investors.

Wednesday’s rules specifically rescind two exemptions, including a requirement that proxy advisers provide a first look to corporations of the advice to be placed on the agenda. It also removes a requirement that allowed clients of proxy firms to be notified of any written responses to their advice from companies.

The SEC, whose composition has changed under President Joe Biden, first proposed these rule changes in November and said investors had expressed concerns that the conditions created increased compliance costs for proxy advisers and impaired the independence and timeliness of their advice….

“While we applaud the Commission for removing some of the 2020 rule’s more draconian provisions, the rule should have been rescinded in its entirety,” ISS said in a statement.

Not everyone welcomed the changes.

“The SEC has offered no justification for abandoning a decade’s worth of bipartisan, consensus-driven policymaking,” said Jay Timmons, chief executive of the National Association of Manufacturers, adding that his group would be filing a lawsuit in the coming weeks to “protect manufacturers from proxy advisory firms’ outsized influence.””

An SEC proposal aims to make it easier for activists to weigh in

Also on July 13, the SEC proposed a rule that would make it more difficult to keep shareholder proposals off their proxy statements. If enacted, the rule would strengthen activists’ positions, making it more difficult for corporations to dismiss them and their proposals. And while the new rule would apply to all proposals, not just to those introduced by ESG-inspired activists, analysts nevertheless view this as a victory for ESG:

“The Securities and Exchange Commission on Wednesday proposed expanding investors’ ability to resubmit proposals on environmental, social and governance issues as the 2022 proxy season sees record levels of votes and Republicans ramp up criticisms of the agency.

The agency voted 3-2 to propose amending a provision known as Rule 14a-8, to require companies to jump through additional hoops when seeking to prevent shareholders from voting on corporate proposals.

If finalized, the changes would likely make it much harder for companies to avoid votes on ESG matters in the future.

The rule as currently written allows shareholder proposals to be excluded if companies say they have been “already substantially implemented,” that they “substantially duplicate” another current proposal, or that they substantially duplicate a proposal that was previously submitted at the company’s prior shareholder meetings, according to the agency.

The SEC proposed amending each of these options so that companies would have to meet a higher bar….

During an open meeting Wednesday, SEC Chairman Gary Gensler said the amendments would provide much-needed clarity. The SEC received more than 700 requests to block shareholder resolutions in the last three proxy seasons, according to the agency. Nearly half of those requests used at least one of the three arguments.

“I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought,” Gensler said. “They also would help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders.”

Republican commissioners Hester Peirce and Mark Uyeda, who was sworn into the agency last month, voted against the change. Both said the move is another example of regulatory whiplash as the SEC unwinds or mitigates actions taken during the Trump administration.

Peirce said the proposal would force executives to rehash old issues year-after-year, “narrowing companies’ ability to exclude proposals.””

WSJ: “SEC’s Gensler Casts Doubt on Prospects for China Audit Deal” 

Lastly, on July 13, SEC Chairman Gary Gensler sounded pessimistic about reaching a deal with the People’s Republic of China on company audits. For years, according to analysts, American capital markets have questioned the validity of self-reported corporate data from China and have argued that the lack of a substantive, verifiable audit process gives Chinese companies an unfair advantage over those from other nations.

In 2020, Congress passed and President Trump signed the Holding Foreign Companies Accountable Act, which will require American exchanges to de-list companies that do not permit their audits to be checked by external authorities.

According to proponents, the urgency of validating foreign corporate audits will take on far greater pertinence when the SEC issues its final rule on climate disclosures. If investors and legislators feel that U.S. companies are disadvantaged by traditional financial audit discrepancies, then that sentiment is likely to grow when U.S. companies are forced to conduct environmental audits as well, they argue. The Wall Street Journal reported:

“Securities and Exchange Commission Chairman Gary Gensler expressed doubt Wednesday that negotiators in Washington and Beijing will reach an agreement over audits that is necessary to prevent Chinese companies from being delisted by U.S. stock exchanges.

Talks between the two countries had intensified in recent months ahead of a looming deadline for American regulators to gain access to Chinese companies’ audit papers as required under U.S. law. Chinese authorities had become vocal in recent months about their desire to avoid the delisting consequence of missing the deadline….

“It’s quite possible that there’s no deal here,” Mr. Gensler told reporters after an SEC rule-making meeting. “I’m not particularly confident.”

The HFCAA took effect in 2021 and bans U.S. trading of securities of companies whose auditors can’t be inspected by the American audit watchdog for three consecutive years. That gives Chinese companies until spring 2024 to comply, though Congress is weighing bipartisan legislation that would shorten the deadline by a year.

The SEC has identified about 150 companies as noncompliant following the release of their latest annual reports, including Chinese e-commerce giants Inc. and Pinduoduo Inc. and restaurant operator Yum China Holdings Inc.

Chinese authorities have long cited national-security concerns as the basis for declining to allow the U.S. Public Company Accounting Oversight Board, or PCAOB, full access to company audit papers.

At the heart of the dispute are profound differences in the two countries’ understanding of what information threatens national security. U.S. officials say company audit papers should not contain anything sensitive. But for China’s authoritarian government, uncensored information of any sort is a risk. Data from large Chinese companies could, for instance, provide insights into the nation’s economy that aren’t available in tightly controlled government reports.

Officials at the SEC and PCAOB have repeatedly said they have little wiggle room under the law to make accommodations for Chinese firms….

In anticipation of the potential delisting from U.S. exchanges, many U.S.-listed Chinese companies have pursued alternative listings in Hong Kong, but their trading volumes in the Asian financial hub still trail their American counterparts.”

In the States

Missouri Treasurer asks the legislature to address ESG influence on public pensions

Last week, Missouri Treasurer Scott Fitzpatrick (R) – who is currently campaigning to be the state’s next auditor – pled with state legislators to address ESG, which he argues has harmful consequences for the state:

“The Missouri legislature needs to examine who is making investments of taxpayer funds held in public pensions, according to the state treasurer.

Scott Fitzpatrick, a candidate for the Republican nomination for state auditor, highlighted his concern during a recent visit to St. Louis. He believes a top legislative priority should be acting on the state’s investment relationships with any Environmental, Social and Governance (ESG) Funds through public pension systems.

“I think the legislators should work on legislation to address the impacts of ESG investing and make sure that state pension plans are not allowing their assets to be voted by asset managers that are advancing a woke political agenda,” Fitzpatrick, who was elected to a full term as treasurer in November 2020, said in an interview with The Center Square. “We’re seeing that in companies like Black Rock.”

Last month, Fitzpatrick distributed a media release in an effort to protect the Missouri State Employees’ Retirement System’s investments “from being used by activist investment managers to advance left-wing social and political causes, which are harmful to shareholders and violated their fiduciary obligations to Missourians.”

Fitzpatrick said state government must take back control of how funds are being managed and proxy votes cast….

Fitzpatrick predicted the federal government will embrace more ESG initiatives through the Federal Deposit Insurance Corp., SEC, the Department of Labor, the Environmental Protection Agency and other rule-making organizations.”

On Wall Street and in the private sector 

Best-returning ESG fund is cautious and contrarian

The top-returning emerging-markets ESG fund managed to outperform its competitors by a wide margin over the last six months by adopting an unusual strategyavoiding the hot tech names:

“The top-performing ESG fund for emerging markets surpassed its peers in the first half of 2022 by adopting a low-risk strategy that rejected tech companies Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Taiwan Semiconductor Manufacturing Co. Ltd.

The Robeco QI Emerging Conservative Equities fund declined 4.9% this year, while the 15 largest actively managed ESG-labeled emerging market equity funds plunged about 23% on average, according to data compiled by Bloomberg.,,,

Top holdings in Robeco’s $2.2 billion fund are Samsung Electronics Co. Ltd., Infosys Ltd. and Bank of China Ltd. By comparison, TSMC ranks as the largest investment for all of the other biggest ESG emerging markets funds, which also have sizable stakes in Tencent and Alibaba. Shares of TSMC, Tencent and Alibaba have fallen as much as 26% this year amid rising global concerns about inflation and slowing economies.

Tech and financials are the biggest holdings in all of the biggest 15 funds, which also focus on four countries — China, Taiwan, South Korea and India. The funds largely avoid markets in Latin America, Africa and other emerging regions. This bias can divert greener capital that poorer countries need to decarbonize their economies and raise living standards….

Rotterdam-based Robeco said its fund’s success reflects a strategy of hand-picking stocks that are considered low risk and perform well over longer time horizons, and a willingness to deviate from its benchmark — the MSCI Emerging Markets Index — by as much as 10%.”