Research and commentary: Details of the report ESG threat to public pension funds from companies providing proxy voting advisory services

A new report from Life:Powered, a national initiative of the Texas Public Policy Foundation, finds that state pension systems, while largely not actively promoting environmental, social and governance (ESG) investing, are still being pushed into ESG trends by companies providing proxy voting advisory services such as Glass Lewis and Institutional Shareholder Services (ISS).

ESG scores are essentially a risk assessment mechanism increasingly used by investment firms and financial institutions that forces companies large and small to focus on politically motivated, subjective goals that are often at odds with their financial interests and those of their customers. Companies are assessed against these mandatory commitments to promote climate or social justice goals, for example. Those that perform poorly are punished with disinvestment and limited access to credit and capital.

“Proxy voting” refers to the process by which a company’s shareholders can vote on company matters such as the election of directors, executive compensation, mergers and acquisitions, corporate governance policies, and shareholder proposals such as environmental policies or practices. sustainable development” without personal participation in the shareholders’ meeting. Shareholders can appoint a proxy – often a person or entity – to cast a vote in accordance with their instructions.

However, the report noted that “in recent years, environmental activists have used this process to integrate their politics into corporate decision-making. They do this by purchasing shares of public companies and forming coalitions with other shareholders to introduce shareholder resolutions and appoint new board members, copying long-standing practices of activist hedge funds. But unlike the hedge funds of old, these activists are not acting for financial reasons but for political reasons, trying to influence companies to support progressive policies on issues ranging from climate change to abortion. It makes sense for companies to consider rules and regulations that directly impact their finances and ability to do business. Although activists typically claim that their actions have financial justification, imposing actions on issues previously removed from the company’s balance sheet deprives executives of the ability to make decisions that will bring the highest financial returns to their shareholders. “

Glass Lewis and ISS hold more than 90 percent of the proxy voting advisory market share and, according to the report, “have become major ESG advocates as the growing number and complexity of shareholder resolutions by ESG activists drive demand for proxy advisory and related services.”

While some state pension systems, such as the California State Employees’ Retirement System (also known as CalPERS) and the California State Teachers’ Retirement System (CalSTRS), have pursued ESG investing, most have not. Yet many people are passively supporting these ESG investing trends through proxy advisors like Glass Lewis and ISS. This is concerning because public pension systems are some of the largest institutional investors in the world, with assets exceeding $5.8 trillion.

The report lists five ways lawmakers can push back against ESG and activist investing, starting by “making it clear in statute that ESG investment strategies and ESG shareholder resolutions are inconsistent with the fiduciary duty of state pensions and should be avoided in all forms.”

Lawmakers should also seek to “revoke all proxy voting powers granted to third-party investment managers and third-party firms unless those managers offer voting rules that allow state pension funds to vote against ESG shareholder proposals” and “require government officials and third-party managers to vote with shares held by state pensions solely for the financial interest of the beneficiaries of such funds.”

Finally, lawmakers should “establish a process for auditing and overseeing proxy voting practices of state and local pension plans and outside managers, with particular emphasis on investigating board elections and proxy votes that are contrary to management recommendations,” and also ask “the committee “audit” or audit committee that regularly examines and reports on proxy votes for state and local pensions and provides reporting tools that enable the Attorney General to expeditiously investigate and prosecute fiduciary misconduct in investments and proxy voting.”

“In addition to ensuring that state pensions do not support ESG activism through proxy voting and investment practices,” the report concludes, “states must develop other tools to mitigate the potential harm that ESG practices may cause to taxpayers, retirees and businesses. ESG activists focus on numerous industries, from energy to firearms to private prisons to agriculture. They should be included in legislation prohibiting state actors from doing business with companies engaging in such boycotting and sanctioning practices. Coordinated boycotts by insurance companies, credit rating agencies and other financial service providers should be investigated under existing antitrust laws.

By clarifying the fiduciary responsibilities of pension fund managers in their states and insisting that maximizing investment returns for clients is their only guiding principle, lawmakers can help ensure the long-term fiscal health of their state’s pension systems and ensure that the promises made to state retirees are kept.

The documents below provide more information on ESG.

Environmental, Social and Governance (ESG) Performance: Threats to Individual Freedom, Free Markets and the American Economy
https://heartland.org/wp-content/uploads/2023/04/2023-ESG-ReportvWeb-2.pdf
This policy brief by Jack McPherrin, a research fellow at the Heartland Institute, provides a comprehensive overview of ESG and proposes specific policy recommendations to counter the insidious influence of ESG.

ESG: a simple breakdown of its elements
https://heartland.org/wp-content/uploads/2022/12/PolicyTipSheetESG1.pdf
This Heartland Institute Rules Tip Sheet contains a brief description of each of the three categories that make up a company’s risk assessment based on ESG metrics, using one of the most frequently used ESG frameworks developed by the International Business Council.

ESG: Financial discrimination
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG8src.pdf
This Heartland Institute Rules Tip Sheet discusses discriminatory practices of financial institutions towards consumers and explains proposed solutions to the problem.

ESG: Banking industry
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG7src.pdf
This Heartland Institute Rules Tip Sheet briefly summarizes how the banking industry has leveraged its coercive market power to ensure ESG compliance.

ESG: Central bank digital currencies
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG6.pdf
This Heartland Institute Rules Tip Sheet provides a brief summary of central bank digital currencies (CBDCs) and how they can be used against society to enforce ESG compliance.

ESG: Negative impact on food supply and agriculture
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG5.pdf
This Heartland Institute Rules Tip Sheet provides a brief summary of how ESG is being used against farmers, food production and the agricultural industry as a whole.

ESG: Impact on free markets
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG3.pdf
This Heartland Institute Rules Tip Sheet offers a brief description of how ESG systems fundamentally change free markets and the natural balance of supply and demand.

ESG: The role of the U.S. Securities and Exchange Commission
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG2.pdf
This Heartland Institute Policy Tip Sheet provides a brief description of the role of the U.S. Securities and Exchange Commission (SEC) in forcing companies to comply with ESG principles.

Nothing in it Research and commentary is intended to influence the passage of legislation and does not necessarily reflect the views of the Heartland Institute. More information about this can be found on the website Environment and climate newsHeartland Institute website and PolitykaBotaHeartland’s free online research database.

The Heartland Institute may send an expert to your state to testify or inform your club; host an event in your state; or send you further information on a topic. Don’t hesitate to contact us if we can help you! If you have any questions or comments, please contact the Heartland Government Relations Department at: (email protected) or 312/377-4000