In this week’s edition of Economy and Society:
- Florida attorney general investigates proxy advisors
- BlackRock engages Republican state officials
- Big Three asset managers seek coal lawsuit dismissal
- Morgan Stanley report says defense stocks could benefit from ESG reclassification
- Scientific Beta argues against ESG ratings
In the states
Florida attorney general investigates proxy advisors
What’s the story?
Florida Attorney General James Uthmeier (R) announced last week that his office is launching an antitrust investigation into Glass Lewis and Institutional Shareholder Services (ISS), the two largest proxy advisory firms.
Why does it matter?
ISS and Glass Lewis control over 90% of the proxy advisory market and can influence how institutional investors, including pension funds, vote in corporate elections—particularly on ESG issues. Florida’s investigation questions whether this concentrated influence (and the advisors’ historical preference for ESG-focused recommendations) is guiding pension fund votes in a way that conflicts with the political and financial priorities of Republican-led states.
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According to West Orlando News:
The Florida AG directed an investigation into proxy advisors Glass Lewis & Co. and Institutional Shareholder Services Inc. (ISS) for potential misrepresentations related to their Environmental, Social, and Governance (ESG) and Diversity, Equity, and Inclusion (DEI) investing policies in violation of the Florida Deceptive and Unfair Trade Practices Act and possible unlawful collusion in adopting and enforcing these policies in violation of the Florida Antitrust Act of 1980. Civil Investigative Demands will be forthcoming according to the Florida Attorney General.
“We won’t allow ESG goals to handcuff Florida businesses and threaten Floridians investments,” said Attorney General James Uthmeier. “If these proxy advisors use their overwhelming market power to advance partisan political agendas rather than maximizing shareholder value, we will hold them accountable.”
Glass Lewis and ISS provide vote recommendations to institutional investors and control a large share of the proxy-advisory market, with some estimates as high as 97%. Institutional investors, such as those who manage the portfolios of many Americans’ retirement accounts, rely on proxy advisors to direct them on how to vote their shares. Thus, the decisions of proxy advisors have a substantial influence over how major American companies are run.
BlackRock engages Republican state officials
What’s the story?
BlackRock, the world’s largest asset management firm, has recently been engaging with officials in several Republican states and distancing itself from its previous pro-ESG positions.
Why does it matter?
Republican states have pulled billions of dollars away from large asset management firms—including BlackRock, Vanguard, and State Street—over the last several years. Now, BlackRock’s recent moves (including purchasing ports in the Panama Canal) have received praise from Republican treasurers in Texas, West Virginia, and other states.
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According to Bloomberg:
From Indiana to Utah, West Virginia to Tennessee, BlackRock has dispatched emissaries to ingratiate itself with Republicans, who’ve lambasted the firm, as well as many of the country’s largest banks and money managers, for pressing a liberal agenda on American businesses.
It’s been five years since BlackRock Chief Executive Officer Larry Fink extolled the virtues of a greener planet and displacing fossil fuels in his annual missives, enraging Republicans in the process. More recently, the company has been dialing back. It’s quit climate groups and drastically reduced support for shareholder proposals designed to make corporate America greener and more diverse. And Fink no longer utters the letters ESG. These days, he prefers to talk about retirement goals rather than net zero goals.
The push appears to be paying off, at least so far. In emailed statements, the treasurers of Texas and West Virginia praised BlackRock for its deal earlier this month to buy ports in the Panama Canal. (Fink had personally contacted Trump, who praised the transaction in a prime time address to the nation as a way to shift control to American hands.)
Big Three asset managers seek coal lawsuit dismissal
What’s the story?
The Big Three passive asset management firms—BlackRock, Vanguard, and State Street—filed a joint motion last week requesting the dismissal of a lawsuit filed by several Republican states alleging the firms’ ESG activities suppressed coal production.
Why does it matter?
The states’ lawsuit alleges that the asset managers used their stakes in coal companies and coordinated illegally through climate-focused investor groups to pressure those companies to reduce production. The asset managers have argued the claim is unfounded.
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According to ESG Dive:
The asset managers’ lawyers said that for the court to find that the states had presented viable antitrust claims would require “contorting the law in a way that would hurt both coal companies and individual investors.” The allegation that they sought to influence the market through their ownership of coal company shares is in violation of a section of the Clayton Antitrust Act, the firms added. The defendants argued that this particular claim “is a nonstarter,” as that section of the act contains an explicit carve-out for acquisitions “solely for investment,” the joint motion said.
The asset managers argued in their response filing that the states not only fail to directly allege that there was an agreement in place between the firms — instead pointing to various current and former climate memberships and disclosures, in the case of BlackRock’s deceptive marketing claims — but that circumstantial evidence would refute that claim.
The investment firms pointed to the growth of coal output between 2021-22, included in a table in the complaint, as well as BlackRock and State Street’s voting histories when they voted against several company directors who cut production and “often did not vote against directors whose companies produced more coal.” Additionally, the filing said there were several instances when Vanguard engaged with a coal company that then increased its coal production that year.
On Wall Street and in the private sector
Morgan Stanley report says defense stocks could benefit from ESG reclassification
What’s the story?
A Morgan Stanley research report estimated that a reclassification of defense companies under European ESG regulations could result in up to $119 billion in new defense investments.
Why does it matter?
Several European leaders have recently suggested defense investments do not conflict with ESG investing principles. If defense is reclassified to align with ESG approaches, the sector could receive additional liquidity.
What’s the background?
For more on ESG and European defense, see here.
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According to Bloomberg:
Funds registered as Article 8 and Article 9 — the European Union’s two main ESG disclosure categories — would have the potential to drive between $53 billion and $119 billion in flows into the aerospace and defense sector, Morgan Stanley analysts including Arushi Agarwal and Rachel Fletcher wrote in a note on Monday.
“Any potential exclusions easing would seem likely to focus on conventional and nuclear weapons,” they wrote. “A full-scale easing of exclusions could drive significant flows.”
Fund managers claiming to target environmental, social and governance goals are already stepping up their holdings of defense assets, amid a wider shift in investment sentiment toward the sector. The move is being encouraged by policymakers in Europe, as the bloc responds to souring ties with the US and an increasingly aggressive Russian war machine.
Scientific Beta argues against ESG ratings
What’s the story?
Scientific Beta, a research organization, index provider, and critic of traditional ESG investment applications, argued that proprietary ESG ratings models are unreliable.
Why does it matter?
The organization says its research suggests traditional ESG ratings (which often guide institutional investments) are subjective and inconsistent.
What’s the background?
Scientific Beta has challenged several ratings industry claims in recent years, publishing research that argues any above-market returns from ESG funds were largely attributable to factors like company quality, not ESG compliance itself.
For more on Scientific Beta’s impact on ESG, see here.
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According to Financial Newswire:
Traditional ESG scoring methods, many of which lack a precise, consistent and evidence-based approach, Scientific Beta argues, are failing to deliver consistent assessments. As a result, many investors may be misled by the genuine sustainability credentials of ESG investment products.
“Scientific Beta has repeatedly warned regulators in Europe and Australia about the greenwashing risks of using proprietary ESG scores to meet investors’ legitimate sustainability goals,” it said.
Citing the firm’s own research, Scientific Beta deputy CEO and index director Daniel Aguet warned that current proprietary models remain “largely unreliable”, with ESG scores diverging significantly from one provider to the next. “Hence, they reflect mostly opinions rather than objective facts”, he said.