A war of words has broken out over the latest efforts to regulate proxy advisers and their ability to vote on ESG (environmental, social and governance) issues in the US.
The latest episode comes after the US Department of Labor (DoL) proposed new rules viewed by many as undermining the ability of proxy advisers to vote on any issue other than financials.
The increasing polarisation of positions sees proxy advisers including ISS on one side insisting they should be able to vote on a wide range of topics, while others argue voting should take place on “economics” only.
For many the debate brings into sharp focus divergence between the US, where President Trump has de-emphasised the importance of confronting climate change by withdrawing from the Paris Climate Agreement, and the European Union where work is under way on regulation to further integrate ESG policies into investment decisions and corporate strategy.
The DoL’s new rule proposes that proxies vote only for the “exclusive purpose” of “securing the economic interests” of pension fund members.
The move is widely viewed as placing tight constraints on how proxy advisers can vote, but also as a further effort to shift proxies away from ESG issues.
Other proposed rules demand that pension fund managers “prove” they have not prioritised other issues at the expense of the pension members.
ISS, one of the world’s two largest proxy advisers, has hit back. In quotes widely quoted, Lorraine Kelly, ISS’s head of governance, described the new proposal as a success for business lobbyists attempting to “mute the voice of shareholders”.
She said the new rule was an “unnecessary” and “draconian” obstruction to proxy voting. She added it would “ultimately weaken portfolio company oversight”.
ESG and its closely associated concept “stakeholderism”, have become contested issues in the US, in contrast to Europe. Investments have been shifting to ESG-related funds, but there have been reports that US boards are concerned about the growing pressure to pursue an ESG agenda.
While many commentators have lauded the drive of investment funds towards ESG priorities others have criticised their research methods, which appear to range from basic web trawls all the way to full-blown investigations.
ESG also has no standardised definition, while the indexes that rate companies on their ESG performance are an evolving industry.
In the US the context is a political landscape which has split over climate and the nature of corporate governance as the US heads towards November’s presidential election.
Trump may have rejected the Paris agreement but throughout the primaries and during the presidential race, Democrats have made a point of criticising corporate “short-termism” and calling for reform of corporate governance.
Democat candidates argued for workers on boards and “charters” to trade for the largest companies on condition they pledge themselves to “stakeholderism”.
Joe Biden, now the official Democrat candidate, has also indicated his own belief in stakeholderism, with his campaign literature declaring he will “ensure that corporate American finally pays their fair share in taxes, puts their workers and communities first rather than their shareholders, and respect their workers’ power and voice in the workplace.” The details of how these policy objectives will be achieved remain unclear.
ESG remains a thorny topic for US investors as regulators continue to push for tighter rules. But an election is coming. The regime may change and with it regulatory attitudes to ESG.