In this week’s edition of Economy and Society:
- House subcommittee addresses proxy advisory firms
- ESG legislation update
- Proxy advisory firm considers changes
- Morningstar cuts ESG jobs
- RBC drops climate finance goal
- Study finds ESG pensions prefer engagement over divestment
In Washington, D.C.
House subcommittee addresses proxy advisory firms
What’s the story?
The House Financial Services Subcommittee on Capital Markets held a hearing last week on proxy advisory firms, which guide institutional investors on how to vote their shares.
Why does it matter?
Opponents say proxy firms promote ESG priorities in shareholder votes—especially Institutional Shareholder Services (ISS) and Glass Lewis, which control a combined 90% of the proxy advisory market. Critics also argue the firms have conflicts of interest.
What’s the background?
The first Trump administration promulgated oversight rules to reduce the firms’ influence, but the Biden SEC rescinded them.
To learn more about proxy voting and its connection to ESG, click here.
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According to the Center Square:
U.S. Rep. Ann Wagner, R-Mo., led the House Financial Services Subcommittee on Capital Markets. The hearing was titled “Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets.”
“This hearing is part of an ongoing effort by this subcommittee to shine a lot on how the proxy process is functioning and, in many ways, failing today’s markets,” she said in her opening remarks. “The purpose of this hearing is to examine the role, practices and market influence of proxy advisory firms on corporate governance, investor returns and broader market outcomes.”
Wagner noted that two firms – Glass Lewis and Institutional Shareholder Services – control 97% of the market for such services. “That concentration alone would warrant scrutiny,” she said. “But more troubling is how their influence goes far beyond research; they now routinely dictate outcomes of shareholder votes. … These firms are not neutral observers, they are for-profit businesses that often sell consulting services to the very companies they evaluate – sometimes with clear conflicts of interest.”
In the states
ESG legislation update
Fourteen state legislatures took action on 30 ESG-related bills last week (since April 29). One bill in West Virginia was enacted into law, two passed both chambers, and four crossed over from one chamber to another.
States with legislative activity on ESG last week are highlighted in the map below. Click here to see the details of each bill in the legislation tracker.
On Wall Street and in the private sector
Proxy advisory firm considers changes
What’s the story?
Glass Lewis—the smaller of the two largest proxy firms—announced it is considering changes to how it advises clients on shareholder voting. The announcement followed the recent congressional hearing on proxy advisory services.
Why does it matter?
Critics argue proxy advisors apply a single, standardized set of recommendations—known as a house view—that promote ESG priorities across all client votes. Glass Lewis is considering cutting the house view in favor of custom voting guidelines for each client, which could reshape how institutional investors approach shareholder proposals.
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According to Semafor:
Glass Lewis, the scrappier and smaller rival of Institutional Shareholder Services (ISS), is discussing a dramatic shift to essentially scrap its “house view” on ballot measures ranging from takeover battles to complaints about gender balance, political donations, and carbon emissions, according to people familiar with the matter and an internal memo seen by Semafor. The move is partly in response to heightened conservative backlash, they said.
Instead, Glass Lewis would help investors develop their own custom voting policies, handle the paperwork and regulatory reporting, and provide data and research. The changes would be phased in over a few years, and the firm would likely continue to make explicit recommendations in the meantime. …
Glass Lewis’ own pivot comes a year into the tenure of its new CEO, Bob Mann, and amid an investigation by House Republicans into it and ISS. The two firms control an estimated 90% of the US shareholder-advice market, which critics say has allowed them to push an ideological agenda. Glass Lewis’ moves would go beyond those of ISS, which said in February that it would no longer consider the diversity of board members when making its recommendations.
Morningstar cuts ESG jobs
What’s the story?
Morningstar confirmed last week that it cut about 6% of staff at its Sustainalytics unit, citing market challenges.
Why does it matter?
The layoffs highlight a broader reduction in ESG jobs across the financial sector. HSBC recently moved its chief sustainability officer role out of the CEO’s office. Other Wall Street firms have dropped ESG language from job titles. Globally, fewer than 7% of people hired into ESG roles in 2020 still hold ESG-specific titles today, according to Live Data Technologies.
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According to Bloomberg:
On Wednesday, Morningstar confirmed a report by Responsible Investor that it had cut about 6% of staff in its Sustainalytics unit. A spokesperson for Morningstar said the company made the “difficult decision” to reduce its global workforce in response to “ongoing market challenges.”
In the UK, HSBC Holdings Plc recently parted ways with a chief sustainability officer whose background included more than six years at the nonprofit We Mean Business. Now, the CSO role no longer reports directly to the chief executive officer of Europe’s largest bank, and is instead occupied by someone who used to be HSBC’s head of global banking for the Middle East, North Africa, and Turkiye. …
On Wall Street, which has turned its back on net zero alliances, firms are dropping “ESG” from job titles. And globally, less than 7% of people who took on an ESG role in 2020 still retain an ESG title today, according to figures provided by Live Data Technologies.
RBC drops climate finance goal
What’s the story?
Royal Bank of Canada (RBC) announced last week that it is dropping its $500 billion sustainable finance portfolio target and is delaying the release of some climate-finance disclosure materials.
Why does it matter?
RBC’s reversal joins the trend of banks reassessing their climate-related pledges amid evolving regulatory standards. Although RBC announced in 2023 that it was nearly 80% toward its $500 billion goal, the bank is now reexamining which types of deals and activities count toward that total, citing regulatory changes as the reason for its review.
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According to ESG Today:
The announcement, revealed in RBC’s 2024 Sustainability Report, follows the passage of amendments last year to Canada’s Competition Act, aimed at tackling greenwashing, or unsupported claims by companies about the environmental benefits of their products or business activities. At the time of the law’s passage, experts warned that while aiming to protect consumers from misleading claims, the amended law could also introduce significant risks for companies and even slow corporate progress on environmental initiatives. …
RBC said that following a review of its methodology, the bank “concluded that it may not have appropriately measured certain of our sustainable finance activities as presented on a cumulative basis,” and the company also noted the recent changes to the Competition Act. …
In addition to retiring its sustainable finance goal, RBC said that it is not currently able to provide disclosures including on its energy supply ratio, which compares the bank’s energy sector financing for low-carbon energy compared to high-carbon energy, or on its progress towards its low-carbon energy lending goals, due to the regulatory developments.
In the spotlight
Study finds ESG pensions prefer engagement over divestment
What’s the story?
A new study from the Manuel H. Johnson Center for Political Economy at Troy University finds that pro-ESG state pension funds favor engagement strategies over divestment. The study reported limited evidence that engagement reduced investment returns but concluded the strategy created costs.
Why does it matter?
The authors argue pension plans have developed strategies that allow them to favor ESG without drastically changing portfolios. They also say pension plan activism can harm publicly traded companies, even if financial returns remain similar.
Read more
According to Troy University professors Allen Mendenhall and Daniel Sutter:
The study suggests that pension funds have developed methods to advance ESG objectives without significantly changing their investment portfolios. This approach enables them to influence corporate behavior while maintaining financial positions. However, all pensions and investors may suffer reduced returns when activism undermines value-creating investment. Pension systems that merely engage, rather than divest, may not underperform compared to other funds, but their tactics allow government backed entities to exert extraordinary influence without sufficient accountability or transparency. …
The research found limited evidence that ESG activism has reduced the investment returns of the California and New York pension systems relative to those in Florida and Texas. However, this finding does not mean that ESG initiatives are cost-free. Instead, the costs are borne by the targeted companies and their investors, who absorb the operational changes and related expenses prompted by ESG demands. This arrangement effectively weaponizes pension fund capital to coerce corporate America into compliance with politically driven objectives, often at the expense of shareholders….
Public pension systems increasingly influence corporate America through shareholder engagement rather than divestment. This approach may generate diffuse but substantial costs for publicly traded companies that are difficult to quantify or trace directly. The trend represents a troubling expansion of state power into private-sector governance and undermines free market principles and corporate autonomy in ways that may damage long-term economic growth.