ISS and Glass Lewis Strike Back on ESG

The two most prominent proxy advisors have returned fire against claims they are failing to follow their fiduciary duty toward investors through their focus on ESG. A January letter signed by 21 Republican state Attorneys General and addressed to ISS and Glass Lewis accused the proxy advisors of furthering a “government-imposed mandate” on climate change by making voting recommendations based on climate commitments. In addition, the letter took umbrage at proxy advisor support of board diversity and racial equity audits, claiming that “arbitrary quotas” and the gathering of demographic data violate state law as well as fiduciary duties. The letter demanded that ISS and Glass Lewis “cease such activity” and respond by the end of the month.

Both ISS and Glass Lewis duly responded, denying the allegations and claiming the Attorneys General were misinformed as to the nature of voting policies and mischaracterizing them as “commitments” or “advocacy.” Glass Lewis took particular exception to the idea that their policy on climate reporting is inconsistent with long-term economic value, while ISS claimed to be a “disinterested fiduciary” providing advice only, with no stake in the outcome.

Meanwhile, House Republicans are launching their own attack on proxy advisors using the lens of ESG via the Putting Investors First Act (H.R. 448). The bill calls for more rigorous oversight of proxy advisors, stating that “Proxy advisors are fueling a movement to weaponize your retirement funds to push a woke social agenda.” It would hold proxy advisors accountable for “making false or misleading statements” and prohibit investors from following recommendations without due diligence, and would also bar activists from submitting “frivolous proposals.”

What is interesting about these developments is that, stripped of the “anti-woke” posturing, the basic criticisms are not dissimilar to those the Center and others have made over the years  - that proxy advisors are insufficiently regulated, often make misleading statements and operate with conflicts of interest. It is unlikely that re-packaging these legitimate concerns to focus on ESG specifically will have long-term success given the current makeup of the Senate. However, it may put the spotlight back on proxy advisors regarding the need for increased oversight.