NYC’s ESG investment approach draws pushback

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 the states

NYC’s ESG investment approach draws pushback

New York City Comptroller Brad Lander (D) has made ESG and fossil fuel divestment two of his priorities for the city’s pension plans. Now—in the wake of lawsuits filed against three of those pension plans—Lander’s investment strategy is drawing more pushback and generating national media coverage. The Washington Examiner ran a piece about Lander on July 19, describing his ESG support and the pushback against his policies:

New York City is leading the charge to exclude fossil fuel companies from pension funds despite pushback to ESG from Republicans at the state and national levels.

The Big Apple has, largely across the board, been working to cut greenhouse gas emissions in an effort to curtail climate change. But it stands apart in its ambitious embrace of environmental, social, and governance investment principles, collectively known as ESG.

Proponents of ESG investing, such as New York City Comptroller Brad Lander, who oversees the city’s pension plans, see ESG investment strategies, for example, moving away from investments in the fossil fuel industry, as compatible with fiduciary duty, as they contend divestments help safeguard plan beneficiaries from the longer-term financial risks associated with disruption from climate change.

But critics, including Republican attorneys general and state treasurers across the country, see ESG investing as a breach of fiduciary duty. They contend that the ESG push is a way for liberal climate goals to be injected into the private market without the use of the ballot box, and that fund managers that do so are violating their duty to get beneficiaries the best returns on investment.

Now the board of trustees of three different pension systems is facing a lawsuit over the 2021 decision for three funds to divest from fossil fuels. The lawsuit argues that the New York City Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System are all in violation of their fiduciary duties by committing to having net-zero emissions in their portfolios by 2040.

Lander, a Democrat, is not buckling to the pressure in what could be a test case for further moves to forward ESG investing and divestment from the fossil fuel space in municipalities across the country. He contends that critics on the Right have made ESG a political hot potato and that the move toward ESG investing shouldn’t be an inherently political matter. …

The lawsuit, which was filed in May by a group of public employees, seeks unspecified damages, including reimbursement of losses from the divestment.

The lawsuit claims that the defendants breached their fiduciary duties and abused control over their plan assets by divesting some $4 billion in holdings in companies involved in the extraction of fossil fuels, something that the complaint characterized as an “ineffectual gesture to address climate change.

“This unlawful decision to elevate unrelated policy goals over the financial health of the Plans is flatly inconsistent with the Defendants’ fiduciary responsibilities, and jeopardizes the retirement security of Plan participants and beneficiaries,” the complaint reads. …

Will Hild, the executive director of the conservative group Consumers’ Research, which has been a major critic of ESG, said the lawsuit will be watched closely given the broader implications of ESG and how municipalities handle these sorts of issues.

“I think that just the filing of this case is going to send shockwaves through public officials who have been politicizing and weaponizing their states and localities’ pension funds in violation of the law,” he told the Washington Examiner.

Hild also said that the discovery is going to have big implications “because it is going to force the comptroller to admit the myriad ways they have been colluding with other players, other pension funds, other major asset managers in ways that are completely outside of their legal authority.”

On Wall Street and in the private sector

Proxy advisory services push back against bias claims

As Republicans on Capitol Hill and throughout the states have pushed back against Institutional Shareholder Services (ISS) and Glass Lewis—the two biggest proxy advisory service providers—the two companies have responded, arguing that they provide unbiased services that allow clients to vote their proxies however they see fit:

ISS and Glass Lewis executives on Thursday challenged Republican concerns that the proxy advisory giants foist ESG policies on companies, telling lawmakers they give objective recommendations to shareholders voting at annual meetings.

The proxy firms provide pension funds and other large investors information they can use, or ignore, when deciding how to vote on environmental, social and governance topics, Steven Friedman of Institutional Shareholder Services Inc. and Eric Shostal of Glass, Lewis & Co. told House lawmakers. Their remarks came amid recent criticism of the proxy firms’ influence by Republican state attorneys general, state treasurers and other ESG skeptics.

But while the companies argue that their services are ideologically neutral, Scott Shepard—the director of the Free Enterprise Project and the National Center for Public Policy Research and an experienced proxy-ballot voter—is pushing back, writing that other metrics show, in his view, that ISS and Glass Lewis are biased:

A lot of the responsibility for pushing corporations hard to the left in recent years lies with an until-recently little-known pair of proxy-advisory companies, Institutional Investor Services (ISS) and Glass Lewis. The profound partisan bias (as well as the profound conflicts) of these companies has been noted before in these pages, but has recently been highlighted by people rather more important than me, including the editors of the Wall Street Journal and the sensible members of the House Financial Services Committee’s subcommittee on Oversight and Investigations.

Once an obscure niche, shareholder proxy votes have become a major issue in recent years exactly because they have been used by the left to force companies away from their fiduciary duties and into taking the hard-left position on a whole series of issues, including equity-based discrimination, political-schedule decarbonization and bizarre and partisan social positions, as with Target having given away many millions in shareholder assets of organizations that train teachers to keep parents in the dark about gender confusion and other related issues that those organizations and teachers have themselves helped to foster.

ISS and Glass Lewis have played a vital role in this process. They are a duopoly, controlling 97 percent of the proxy advisory market. They are vastly conflicted in giving advice about how shareholders in American companies should vote, in that they are owned by European and Canadian firms, respectively, so that their owners have a vested interest in saddling American companies through private proxy action with the same sort of value-destroying regulations that the EU and the increasingly absurd and authoritarian Canadian government have instituted. …

Gary Retelny, the President and CEO of ISS, claimed recently that “[o]ur proxy advice is apolitical [and] impartial.” …

In support of his claim, Retelny notes that “ISS’ benchmark policy supported just 52 percent of all shareholder proposals characterized as ‘environmental’ or ‘social’ while supporting more than 96 percent of management resolutions.”

This, though, isn’t exculpation from the claim of partisanship. It’s a demonstration of it. It reveals that ISS’ benchmark policy takes the left side of social and environmental proposals about 60 percent of the time. This is because about 10 percent of all shareholder proposals come from center/right organizations, and ISS has never, ever supported one of those. So his supposed demonstration of non-partisanship really demonstrates that the score is:

–ISS support of leftwing social and environmental shareholder proposals: 60 percent.

–ISS support of center/right social and environmental shareholder proposals: 0 percent.

In fact, ISS refuses even to communicate with supporters of such proposals. A financial industry firm that works with ISS has been trying to get it to commit to a meeting with center/right shareholder-proposal proponents for many, many months, wholly without success.

In further “evidence” of non-partisanship, Retelny asserts that ISS offers voting-recommendation options “that range from one largely aligned with board recommendations to another for faith-based investors.” The thing is, though, that, as BlackRock of all organizations has demonstrated, its impliedly center/right religious specialty option is pretty much liberation theology leftism, “generally support[ing]” the leftwing ESG proposals that ISS’ baseline supports.

Once again, then, what Retelny’s evidence really shows is that both ISS’ baseline and specialty policies support great scads of leftwing ESG proposals, while it has no policies at all that support any center/right shareholder proposals.

In the spotlight

BlackRock announces plans to allow investors to vote their own proxies

The Big Three passive asset management firms—BlackRock, State Street, and Vanguard—have been criticized for using investors’ money in pursuit of political goals. The firms use the funds that they invest on behalf of their clients and vote the proxies that, outside of a pooled index or mutual fund, investors would typically vote themselves. ESG critics have said that such practices undermine shareholder rights.

BlackRock has responded to this criticism by promising to give their clients the ability to vote the proxies associated with their stock shares. The firm began allowing some large institutional clients to vote their proxies last year and is ready to open the option to more investors:

The world’s top asset manager BlackRock said it will offer proxy voting choices to U.S. retail investors of its biggest exchange-traded fund, expanding a strategy that could blunt criticism of how the firm considers environmental, social and governance (ESG) matters.

A representative for New York-based BlackRock said it plans to announce on Monday that investors in its iShares Core S&P 500 ETF (IVV.P) will be able to chose among a range of policies to determine how the fund votes their shares at corporate annual meetings.

Retail investors hold about half of the $305 billion fund’s assets. Fund clients will be able to choose among voting plans from proxy advisers Institutional Shareholder Services and Glass Lewis & Co, including one that prioritizes climate considerations and a new ISS offering, aimed at conservatives, that favors company managements.

Investors will not be able to specify votes in specific company elections. But the program meant for the 2024 proxy season still marks a significant expansion of BlackRock’s efforts to give investors control, to date meant for institutional customers.

While many clients will rely on the votes BlackRock will continue to cast, “consistent with our fiduciary duty as an investment manager, others want the choice to participate in proxy voting more directly,” said Joud Abdel Majeid, Global Head of BlackRock Investment Stewardship, in a statement.