21 Mar Calling Them Out
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
The Pushback Makes All the Difference
The other day, Will Hild, the Executive Director of Consumers Research, penned a short but compelling Twitter/X thread on the role that Institutional Shareholder Services (ISS) plays in the proxy voting process. Specifically, Hild broke down a conversation between CNBC’s Andrew Sorkin and Lorraine Kelly, the Global Head of Stewardship at ISS. Sorkin started the discussion with the suggestion that ISS plays an outsized role in determining proxy voting decisions and, over the course of the conversation, compelled Kelly, unwittingly, to concede as much. You should, as they say, read (and watch) the whole thing.
Although the entire exchange is interesting, what specifically caught my attention was the bit in which Kelly declares that ESG proxy voting is no big deal because ESG shareholder proposals are, steadily, year-over-year, losing support, something she implies is happening “organically.” But that’s hardly the case. “What she leaves out,” Hild notes in response, is “that a significant portion of the drop [in support for ESG proposals] is because ISS stopped supporting them after [Consumers Research] and others called them out for playing politics with their clients’ votes.” In short, ISS is defending its role in the ESG-industrial complex by cherry-picking the data, by discussing only the numbers from after they were caught pushing ESG aggressively and after the opposition to ESG began in earnest.
And here’s the thing: this is not an isolated incident. Cherry-picking the data is, in fact, fairly common among the formerly full-throated supporters of ESG. By analyzing data from an exceptionally limited time frame, ESG advocates believe they can fool the rest of us into believing that we are getting all worked up over nothing, that ESG is not a big deal, and that most criticism is, therefore, invalid.
Consider, for example, the now-suddenly-ubiquitous defenses of The Big Three passive asset management firms – BlackRock, State Street, and Vanguard. They never act in concert, we’re told, so why worry about them? They don’t coordinate. They have different goals. And anyway, they don’t control that much of the market. And even if they do, they now let their fund owners vote their relative shares. So…leave them alone already. Stop spreading “conspiracy theories.” Stop encouraging people to be afraid of the Big Bad Three.
The following, from an October article at CNBC, is typical of this genre:
If you own an S&P 500 index fund, though, you own shares in roughly 500 companies. As a matter of convenience, instead of mailing you 500 proxy ballots, asset managers vote on your behalf, advancing what they generally believe to be the best financial interests of their shareholders.
Here’s where the critics come in. [Strive Co-founder and former presidential candidate Vivek] Ramaswamy and others say that these asset managers use voting power to push ESG initiatives — those aimed at improving environmental, social and governance issues at these companies — that they claim are detrimental to these firms’ bottom lines….
The thing is, the asset managers are very transparent about their voting process and how they vote. Read through the vast literature asset managers publish on this topic, and you’ll find that the majority of these votes are on mundane corporate issues. During the 2023 proxy year, Vanguard voted 93% of time in favor of management-led proposals to elect directors — all 24,679 of them.
BlackRock, for all of the handwringing around its ESG initiatives, reports that the vast majority of shareholder proposals on environmental issues and those affecting people either lacked economic merit or concerned issues that were already being sorted out by the companies in question. As a result, BlackRock says, the firm supported just 26 out of 399 — 7% — of such proposals.
And any claims that the so-called “Big Three” are acting as a cartel on ESG issues are spurious as well….
In an analysis of Vanguard, BlackRock and State Street proxy voting in the two years ending in March 2023, a Morningstar report found the three asset managers disagreed on key votes more than two thirds of the time.
The dead giveaway here is the time frame cited in the defenses: “During the 2023 proxy year,” and “in the two years ending in March 2023.” Oh. Well, why did we choose those dates? That seems pretty narrow. Why didn’t they also look at the 2021 proxy year or the “three years ending in March 2021?”
These are all rhetorical questions, of course. We know why CNBC and Morningstar chose these specific years. We know what things looked like before those years. We know, for example, that the Big Three did, in fact, act as a cartel for a few years. And we know why they stopped acting as a cartel – namely because they got caught.
Before about 2018, the Big Three all operated independently, focusing on their different missions and clientele. After 2018, however, and under pressure from activist shareholder groups, all three adopted a sustainability-based approach to investment decisions and engagement, which aligned them almost perfectly with one another. For the next three years, they all voted, engaged, and marketed nearly in lockstep – all supporting ESG initiatives and a focus on sustainability.
Between the 2021 and 2022 proxy seasons, however, several things happened. Among the most significant of those developments was that which we can call “consciousness raising” about ESG, about the risk that sustainability-based investment decision-making posed to corporations and capital markets, and about the collusive behavior of the Big Three. By the time the 2022 proxy season was in full swing, the Big Three were on the defensive and were doing whatever they could to make it appear that they never had any interest whatsoever in coordinating with one another. Or to echo Will Hild’s sentiments above, the Big Three stopped acting like a cartel because interested parties called them out for playing politics with their clients’ wealth.
CNBC continues its defense of the Big Three:
Still, you might be thinking, I don’t like the idea of these big mutual fund companies voting on my behalf, especially on issues that could be seen as political. Firms are testing out programs to address these concerns.
Vanguard, BlackRock and State Street have all launched pilot programs in recent years that allow shareholders in certain funds to direct the asset managers on how they’d like to vote on certain issues.
In other words, these firms are acknowledging that it’s your money they’re putting into markets, not theirs.
Again, this is true…but only because we called them out on it.
The ultimate disposition of ESG as an investment tool remains to be seen – despite the fact that the verdict is already largely in on its disposition as an effective investment tool. ESG is likely to remain a capitalization and engagement instrument for a long time, primarily because of the influence of government and government-affiliated entities. That’s unfortunate, for a handful of reasons.
Nevertheless, what remains of the practice has been improved immeasurably – in terms of transparency, fiduciary responsibility, and individual choice – by the critiques leveled by its opponents, those whose criticism Lorraine Kelly and CNBC seek so desperately to dismiss. In other word, it is true that ISS and the Big Three are doing better at meeting their obligations than they were a few years ago, but it’s highly unlikely that would be the case without the pressure applied by ESG’s critics.
