A Washington, D.C., think tank is pressing lawmakers to reform an unregulated industry that environmentalists are using to browbeat companies into complying with costly rules designed to tackle global warming.
Lack of governmental oversight has allowed proxy advisory firms to hoodwink investors into pushing expensive shareholder proposals that don’t add economic value to companies. Proxy advisers act as shadow regulators operating outside of the government, according to a report Tuesday from the American Council for Capital Formation (ACCF).
Proxy advisory firms provide analysis and consulting services to issuers and companies about how annual and special proxies should be voted. The lack of transparency and competition in the proxy advisory firm industry gives a small number of businesses significant influence over how corporations deal with environmental issues.
They create disclosure requirements, most of which are entirely unaudited, that force companies to show they are taking efforts to curb greenhouse gas emissions. The process especially disadvantages small companies in favor of larger companies that have the resources to comply with investor dictates, ACCF’s report notes.
“We found out that their proposals can [be] very costly for a corporation,” Timothy Doyle, one of the report’s authors, told The Daily Caller News Foundation. “For large companies .. they can bear the costs, but we found that the burden was disproportionate on small companies.” He noted that ACCF is only interested in transparency.
“Show us your data,” he said of the proxies who work behind closed doors with investors to craft the proposals. “Why you think these things will pay off. If you can give a good economic reason, then show us.” It’s fine for individual investors to push proposals forcing companies to disclose environmental stewardship, Doyle said, but spreading those risks to all other investors is dangerous.
The two primary players in the industry are Institutional Shareholder Services (ISS) and Glass Lewis, both of which control 97 percent of the sector’s clientele, made up exclusively of so-called ESG (Environmental, Social and Governance) investors. ISS and Glass Lewis are privately-held companies, and therefore not subject to regulation by the SEC and other agencies that regulate the corporate world.
Republican Rep. Sean Duffy of Wisconsin and Democratic Rep. Gregory Meeks of New York introduced a bill to place proxies under the SEC purview. The bill passed the House easily but is now awaiting U.S. Senate. The ACCF, which also acts as a lobbyist pushing to reform the agency, has signed off on Duffy and Meeks’ legislation.
Proxy advisers used their influence among investors to force Exxon into adopting proposals on climate issues. Executives at the company opposed a shareholder measure in December 2017 forcing Exxon to publish detailed reports on the effects of oil production on the climate, but activists managed to gather enough votes to pass the measure.
The measure asked Exxon potential risks of “technology changes and from climate change policies such as the 2015 accord aiming to keep average global temperature increases below 2 degrees Celsius,” Reuters reported in May 2017. The Trump administration also appears to have taken notice of both ESGs and the proxy advisers who wield them.
The Labor Department issued a warning Monday to managers of retirement funds to avoid using politically motivated investment strategies to tackle environmental issues. Several retirement funds have used exotic techniques during the past several years to submit proposals designed to push political campaigns.
Using resources to promote ESG proposals is a violation of a pension fund’s fiduciary duty unless the proposal can financially improve the company’s value. If the shareholder cannot demonstrably prove the proposal’s financial benefit, then pension recipients can sue the retirement fund for mishandling their money.