Republican state attorneys general are seeking assurances from the nation’s top proxy-voting advisory firms that their advice will not reflect non-financial criteria, such as reducing greenhouse-gas emissions or increasing diversity in the workplace.
In a letter dated Tuesday to Institutional Shareholder Services Inc. and Glass, Lewis & Co., the group of 21 attorneys general said incorporating social considerations into their guidance on how to vote on proxy forms would amount to a conflict of interest and be at odds with contract requirements that the firms provide advice that maximizes shareholder value.
Both companies did not immediately respond to requests for comment on the letter.
Proxy advisers provide direction to large investors, including states, on how to vote on a myriad of issues put before shareholders at annual meetings, including executive-pay packages and potential mergers and acquisitions.
“Because these firms have a duopoly in the proxy advisory market, they exercise enormous influence in advancing the ESG movement,” said Utah Attorney General Sean Reyes, who is helping lead the effort. “A proxy advisor must prioritize the economic value of their clients’ investments. Unfortunately, it appears these two companies are prioritizing political activism over the best interests of Utah and its citizens.”
The letter claims that the two companies, in one instance, have both pledged to recommend votes on company directors and proposals based on whether a company is implementing net-zero emissions goals and related climate commitments.
Reyes and his colleagues want information and assurances from ISS and Glass Lewis that they will uphold their legal obligations in performing proxy advisory services.
The letter comes as investors and companies take stands on social issues. The movement is known as environmental, social and governance, or ESG, investing, which considers non-monetary factors such as climate change in an effort to ensure positive long-term outcomes.
The practice has riled Republican-led states. According to the law firm Morgan Lewis, 18 states in 2022 proposed or adopted legislation limiting the state government’s ability to do business with entities that are identified as boycotting specific industries based on ESG criteria.
GOP-led states are continuing the trend in 2023. Florida Gov. Ron DeSantis (R) on Tuesday announced that his administration updated Florida’s retirement system pension-plan policy and corporate governance proxy voting guidelines to spell out that investment decisions are to be based on financial factors.
Lawmakers in at least five states have introduced bills in the 2023 legislative session targeting ESG investing. That includes Arkansas, where a measure was recently introduced to prohibit discrimination by state agencies on the basis of an ESG credit score.
An ESG credit score is a way of rating how ESG-friendly a company is. Moody’s has created an “ESG Score Predictor” that offers users ESG reports for 100,000 businesses, many of which have never produced their own ESG metrics, according to the conservative Heartland Institute.