ESG proxy advisors taken to task in House hearing

House Republicans are turning up the heat on their war against environmental, social and governance considerations in capital markets, this time going after proxy advisors who provide ESG-related services to investment officers.

That was the subject of a House Financial Services Committee hearing Tuesday, which quickly descended into a partisan battle on whether investors need and deserve more information when making their investment decisions, in addition to whether ESG considerations are essential for safeguarding investors or represent a nefarious and predatory band of money-mad pirates wreaking havoc on an otherwise sound system.

“The ESG movement has reached its peak and investors, hedge funds, and companies are experiencing the costly effects of focusing on ESG initiatives rather than creating shareholder value,” said Rep. Bill Huizenga, R-Mich. “Regrettably, the ESG movement is being kept afloat by familiar allies,” he added. “Democrats, progressive activist investors and proxy advisory firms themselves have conspired to push woke ideology on millions of unsuspecting American investors.”

Proxy advisory firms provide institutional investors with research and data, recommendations on management and shareholder proxy proposals that are often voted on at an organization’s annual and special meetings, said proxy advisor Glass Lewis, one of the firm’s mentioned in the hearing. “Operating as independent research firms, they digest and evaluate lengthy and complex filings on common corporate endeavors, including mergers and acquisitions, CEO salary, and more.

Michael Frerichs, Illinois State Treasurer and a witness before Tuesday’s hearing with real experience in using proxy advisors, said that without such assistance, it would be very difficult for him to do his job as well.

“If we wanted to maintain the same standard, we would have to go out and hire a lot of people, costing the taxpayers more money,” Frerichs said. “Part of the reason why study after study and meta studies have shown that anti-ESG legislation is costing states money. If you really believe in the free market, we should let people make decisions.”

Rep. Rashida Tlaib, D-Mich., noted in her remarks that such efforts disrupt the municipal bond market and that divesting from funds that use ESG factors for investing is expected to cost states billions.

An analysis from Pleiades Strategy, a group that tracks the number of anti-ESG bills passing through state legislatures, said this year, 161 bills aimed at stifling ESG investing have been considered across the country and just six became law, a drop from the 23 anti-ESG laws enacted in 2023.

But still there are concerns over third party service providers paid for by taxpayer money,  in addition to concerns over how the Securities and Exchange Commission is helping to facilitate this process.

In 2020, the SEC required proxy advisors to “make proxy voting advice about a company available to the company in advance of or concurrently with disseminating it to their clients and have a mechanism for making clients aware of the company’s response statement before they vote,” law firm Sullivan and Cromwell said. 

In 2022, the SEC adopted amendments to remove these requirements and this year, after being sued by the National Associations of Manufacturers and others, a three-judge panel in the Fifth Circuit Court of Appeals ruled that the SEC had acted arbitrarily and capriciously in removing these requirements and violated the Administrative Procedure Act.

“This is my third administration,” Huizenga said. “This is the first time I’ve ever seen the SEC pull back on its authority, even in a Republican Trump administration, they certainly didn’t cede territory that has been well established. In fact, we’ve seen this SEC go the opposite direction, which has been nothing but expansionist in their authoritative footprint.”

Throughout the ninety minute hearing Frerichs defended the use of proxy advisors by saying they don’t treat them any differently than any other consultant they might employ, and that their recommendations are based on prudent and diligent research. 

“Restricting the ability to access or use data to make investment decisions is fundamentally anti-free market,” Frerichs said. “It is literally an Orwellian system where the government claims ignorance is strength.”

This hearing also follows an August report, released by the House Republican ESG Working Group, titled “The Failure of ESG: An Examination of Environmental, Social and Governance Factors in the American Boardroom and Needed Reforms” and included a few recommendations concerning proxy advisors.

“There are concerns about the detrimental impact of inaccurate information and incomplete analyses provided by proxy advisory firms. Investors who rely on the firm’s recommendations are at risk of making uninformed decisions, undermining the integrity of the market,” the report said. “To address this issue, proxy advisors should engage in open and constructive communication with issuers, allowing issuers the opportunity to respond to and rectify any inaccuracies in the advisory reports.”