Sarah Hunt

As originially published in Real Clear Policy on September 21st, 2023

Asset managers remain embroiled in ESG political fights with state legislatures,, despite clarifying their positions on ESG management with public funds. Oddly unscathed are the two dominating proxy advisory firms: Institutional Shareholder Services (ISS) and Glass Lewis. The controversy’s attention is now focused on the “Big Three” asset managers, BlackRock, Vanguard, and State Street. But the real issue of proxy advisory firms controlling votes for some of the country’s largest pension funds has largely flown under the radar.

Participants made good points during the ESG-focused House Financial Services Committee hearings in July: the proxy advisory industry is effectively a duopoly. Glass Lewis and ISS – which control 97 percent of the proxy advisory market – initiated most ESG implementation.  ISS and Glass Lewis are the actors pushing the ESG agenda. These advisory firms continue to be aggressive about ESG voting recommendations, in contrast to large asset managers. With this power, the proxy advisors are quasi-regulators despite lacking statutory authority.

Big Three asset managers vote more conservatively than ISS and Glass Lewis recommend. A report from ShareAction, a shareholder advocacy group, found ISS recommended voting for ESG resolutions 75 percent of the time and Glass Lewis 41 percent of the time. Compare this to State Street voting in favor of ESG resolutions 29 percent of the time; BlackRock, 24 percent; and Vanguard, 9 percent. Although most of the large asset managers use one or both of the proxy advisory firms for general analysis and reporting, most of them do not blindly follow ISS or Glass Lewis’ voting recommendations.

New data reveals asset managers’ support for ESG resolutions fell to 15 percent in 2023, from 25 percent in 2022 and 32 percent in 2021. Specifically, two of the Big Three – BlackRock and Vanguard – backed significantly fewer ESG shareholder proposals over the past year. BlackRock supported merely 7 percent of proposals related to climate change and social issues in the past 12 months. Vanguard supported a minute 2 percent. The last of the Big Three – State Street Global Advisors backed 32 percent of ESG resolutions this year but is down from 44 percent in 2022 and 49 percent in 2021.

Asset managers are responding to political concerns about ESG. Continuing to center the ESG debate on asset managers will cost Americans in the end. The two proxy-advisory firms that control the industry are doing the real voting on, and passing of, ESG standards. Yet, some states are passing legislation that gives these proxy firms more power as they reduce the power of asset managers. This extraneous solution will potentially cost taxpayers.

One example is the Nebraska Investment Council (NIC). The NIC authorized hiring a third-party “proxy service provider” to cast proxy votes on behalf of the state. This will cost approximately $100,000 annually – a direct withdrawal from the investment revenues for pension holders. The decision was made to take voting power away from BlackRock, the current financial advisor of the state. Unless the Nebraska Investment Council actually undertakes their own analysis at great expense, they will be forced to lean on Glass Lewis or ISS to advise them. Already Glass Lewis has been hired to guide the pensions funds of states including Arizona, Florida, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, and Virginia. This guidance includes letting Glass Lewis vote their shares – which essentially means pushing their own ESG agenda.

Fiscal conservatives are right to ensure Americans have confidence that public investments are made to maximize returns. Asset managers, however, are working to solve the problem. Overcorrection will perversely achieve the opposite of the intended impact. The proxy advisory firm duopoly is the looming problem behind ESG investing and voting for ESG initiatives with public funds. The Big Three asset managers, who continue to absorb the majority of the anti-ESG punches, are simply providing ESG funds – desired by some clients – to the market.

As Charles Gasparino said in his latest piece, ESG is on its last leg. This tired debate about asset managers should be, too, as long as they continue to course correct.

Sarah E. Hunt is co-founder and CEO of the Joseph Rainey Center for Public Policy. Previously, she ran clean energy and climate change programs at the American Legislative Exchange Council and the Niskanen Center.