17 Oct PUBLIC PENSION CORNER, #17
NEWS:
I. SEC looks to limit ESG shareholder proposals
SEC Chairman Paul Atkins noted last week that the Commission will undertake an effort to reassess its shareholder proposal rules, specifically with the intention of limiting ESG proposals and undoing the politicization of the proposal process:
The Securities and Exchange Commission will rethink a federal regulation that requires companies to include ESG-related shareholder proposals in their proxy filings, chairman Paul Atkins said late Thursday.
Atkins, speaking at the University of Delaware, said the SEC’s previous position had driven the “politicization of shareholder meetings.”
Eight decades after the rule on shareholder proxy access was first promulgated, changing circumstances—including the falling number of publicly traded US corporations—call for a fresh look at “the rule’s fundamental premise,” he said, specifically criticizing investor initiatives tied to environmental, social and governance goals.
II. EU to “Delay” ESG Reporting for non-EU Companies
The European Union has decided to “de-prioritize” some aspects of its new ESG regulations, which are set to go into effect next year. Among the key bits of de-prioritization is a delay in the start date for non-EU companies to report their ESG data under the Corporate Sustainability Reporting Directive (CSRD):
The de‑prioritisation process was revealed in a letter from the Commission to the EU’s financial regulators, forming part of its simplification agenda, aimed at boosting Europe’s productivity and global competitiveness, and reducing administrative burdens on companies. In the letter, the Commission notes that regulations and directives passed over the past several years have empowered the Commission to adopt around 430 follow-up legislative acts, noting that “such a large number of measures to be adopted is a concern for stakeholders,” and listing 115 that have been identified as “non-essential” for the achievement of EU policy objectives – including the Delegated Act on European Sustainability Reporting Standards for certain third country undertakings.
The ESRS sets out the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s CSRD, which began applying from the beginning of 2024. The CSRD also includes a requirement for large non-EU companies that operate in the EU to provide sustainability reporting based on ESRS for third country undertakings, with reporting requirements currently scheduled to begin in 2028.
The ESRS adoption for non-EU companies under the CSRD was initially scheduled for the end of June 2024, although EU lawmakers adopted a directive last year postponing the adoption to the end of June 2026. The letter states that the de-prioritized acts listed will not be adopted by the Commission before October 2027.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Change is Good”
Glass Lewis, the second-largest proxy advisory service in the world, announced this week that it will drop its benchmark vote recommendations, starting in 2027. While a significant development, this isn’t exactly a surprise, as the firm had signaled its intentions earlier this year. Additionally, while this decision is inarguably good news for those who have been pushing back against ESG and against the ESG-friendly proxy advisory duopoly (Glass Lewis and its larger competitor, Institutional Shareholder Services), it is probably not the “great news” and the massive “retreat” that the good folks at The Wall Street Journal’s editorial board believe. It is also not, by any stretch of the imagination, a move that was triggered by the likes of JP Morgan Chase CEO Jamie Dimon, as the Journal also appears to believe.
In truth, Glass Lewis’s decision to drop its house view was a perfectly rational business decision that will, almost certainly, benefit its bottom line. Moreover, it was a business decision that can largely be summed up in four words: Europe, Texas, and Jerry Bowyer.
Europe:
I have written interminably over the last couple of years about the divergence between Europe and the United States on the value and fiduciary status of ESG. Whereas the United States remains principally dedicated to the idea that corporate decision-making must be animated in most cases by a traditional and largely pecuniary understanding of materiality, Europe has strongly embraced the stakeholderist notion of “double materiality,” which posits that decision-making must balance pecuniary interests with broader societal concerns.
I have repeatedly suggested that this difference will, over time, constitute a significant competitive advantage for American corporations, which will be empowered to perform more effectively and productively than their European counterparts. At the same time, it’s important to note that the difference also constitutes a major complication for the proxy advisory services, particularly their house benchmarks. American capital markets are inarguably the global standard and, as such, are the focus for most investors and investment-related businesses worldwide. Nevertheless, Europe is home to roughly 85% of all ESG investments. And given the respective regulatory and market states of play, that percentage is likely to climb over the next few years. Offering a single house voting policy in such an environment makes no sense at all. If the Big Two proxy advisors were to change their benchmarks to suit the larger, more important American market, they would run afoul of the EU’s far stricter regulatory regime. If they keep their current policies, however, they will not only struggle to meet the needs of the American customers, they will also draw the ire of the country’s diverse, federalist regulatory system.
Which brings us to…
Texas:
This past June, the Texas legislature passed, and Governor Greg Abbott signed into law, SB 2337, which regulates proxy advisory services, compelling them to provide vote recommendations based exclusively on the financial interests of shareholders. In July, Glass Lewis and ISS filed separate suits to halt the implementation of the law, which was to go into effect on September 1. On August 29, a federal judge placed a temporary injunction on the law’s enforcement to allow those suits to proceed. Whatever the outcome of those cases, the proverbial die has been cast. (And, indeed, after SB 2337’s enforcement was paused, Texas Attorney General Ken Paxton announced an investigation of Glass Lewis and ISS for “potentially misleading institutional investors and public companies by issuing voting recommendations that advance radical political agendas rather than sound financial principles.”)
In other words, at some point, fighting the ESG pushback has or will become more trouble than it’s worth for the Big Two. Glass Lewis simply acknowledged that reality.
Jerry Bowyer:
As for the final two words explaining Glass Lewis’s decision to drop its house policy, I should note, up front, in the interests of transparency, that Bowyer Research is a sponsor of this newsletter. Additionally, the author of this newsletter, yours truly, does some ESG consulting for Bowyer Research.
All of that said, I would also like to note that the decision to work with Bowyer Research was made in large part because of the contributions to this debate that Jerry and his company have made, not to promote those contributions. It just so happens that in this context, Bowyer Research changed the proxy voting game forever.
In brief, for the past two years, Bowyer Research has provided custom voting guidelines to public pension funds, enabling those funds to vote in accordance with their fiduciary duties and to circumvent and pro-ESG bias that might be included in house benchmark policies (or other policies, for that matter). Jerry describes the Bowyer Research guidelines as “ESG skeptical,” noting that they were “designed for investors who wish to counter the promotion of ESG ideology by political activists….” This past April, Bloomberg ran a long profile on Jerry and Susan Bowyer and their company, noting the following:
Institutional Shareholder Services Inc., which influences how millions of shares are voted each year, offers Bowyer Research’s guidelines among its categories for voting. Egan Jones, another advisory firm, is doing the same for the first time this year.
State-run funds in Republican-led Texas, Louisiana and Wyoming also are users of Bowyer Research. The $57 billion Texas Permanent School Fund was the first state fund to sign up. The Texas fund needs to vote its shares “in the interest of the people we serve,” said Chair Tom Maynard, explaining why it uses Bowyer Research. It isn’t going to be a “silver bullet,” but it’s another way to counter activism from the left, he said in an interview.
The Bowyers see their main attraction as providing a program that allows investors to gain better control over how their shares are used in investor votes on conservative issues. These include rejecting proposals that promote climate-related initiatives and supporting those that fight religious discrimination and debanking.
In addition to giving ESG-skeptical, pro-fiduciary pension-fund managers the opportunity to vote their consciences, Bowyer Research also gave the proxy advisory giants a glimpse of the future. If I were Mr. McGuire, telling Benjamin Braddock about that future with “just one word,” that word would be “customvotinggiuidelines” (rather than “plastics”). The widespread use of custom guidelines similar to those created by Bowyer Research will enable the proxy advisory services to evade the (legitimate) charge that they are pushing a political agenda, even as it allows them to serve their clients more effectively.
The proxy advisory world changed this week, and it changed for good. No one should be surprised by this, however, as it constitutes the culmination of several trends, as well as a lot of hard work. There is more work to be done, obviously, but I can promise you that it’s already being done.
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