US Republicans accuse ISS and Glass Lewis of potentially violating legal duties

Republican state attorneys-general say proxy advisers Institutional Shareholder Services and Glass Lewis may have breached their legal and contractual duties in what some see as a pushback against ESG.

In the latest action against investors and their advisers considering environmental, social and governance factors in their decision-making, 21 attorneys-general have written to proxy advisory firms Institutional Shareholder Services and Glass Lewis warning that the companies’ “climate and diversity, equity, and inclusion priorities” may interfere with the legal and contractual obligations they have with states’ investment vehicles.

In their January 17 letter, the attorneys-general write that those agreements “typically require that [the advisers] consider only one goal: the economic value of the investments”. It cited the state of Texas’s proxy policy, which said that economic interests must not be subordinated “‘to unrelated objectives’ pertaining to social or environmental policy”.

“ISS and Glass Lewis have potentially violated their legal and contractual duties as proxy advisors,” the attorneys-general said.

Both advisers were criticised for their linking of recommendations to companies’ decisions over emissions targets. ISS was accused of presenting a “quintessential example of elevating non-financial considerations over financial ones”, having argued for the finance industry’s role in the global transition towards a low-carbon economy, according to the letter. 

An ISS spokesperson said that the “letter reveals a fundamental misunderstanding of market forces at work”.

The letter cited Glass Lewis, meanwhile, as having recommended that Woodside Petroleum shareholders vote against the Australian company’s climate plan over concerns that it did not do enough to cut customers’ emissions. “Glass Lewis faulted the company for not having a good enough plan to get its customers to stop buying its own product.” 

The attorneys-general asked the advisers to explain their analysis for the disclosure of emissions reduction targets, as well as whether they agreed that “pressuring companies to adopt renewable energy means increasing dependance [sic] on China, given China’s dominance of the renewable energy supply chain”.

Firms’ response

An ISS spokesperson said: “As an independent provider of research and voting recommendations, ISS’s sole agenda is to provide its clients with tools and policy options to enable them to make informed investment decisions and vote their shares in accordance with their distinct views and fiduciary responsibilities.

“We take our legal obligations seriously, will respond to questions laid out in the letter, and look forward to continuing to serve our investor clients with the diversity of independent and objective research offerings they demand.”

Earlier in January, Glass Lewis, which did not immediately respond to a request for comment, laid out examples of how it had dismissed a handful of ESG shareholder campaigns in 2022. “Certain elements of ESG investing have yet to prove viable when market or geopolitical conditions become strained, as they did over the past year,” Glass Lewis said in its review.

It highlighted how it had advised clients to oppose a “small” activist shareholder’s proposal that called for German energy company RWE to spin-off its coal business. 

“In making its case, the activist appealed more to shareholders’ economic interests than their potential concerns regarding the environment, arguing that continuing to own and operate coal-fired power plants made RWE uninvestable and suppressed its market valuation at lower levels relative to pure-play renewable energy companies,” Glass Lewis said.

The board responded that any spin-off or disposal would be best conducted alongside the German government, with both parties agreeing that a government-backed model for its coal business would be the ideal outcome. 

“While recognising the potential valuation upside of an eventual separation of RWE’s ‘clean’ and ‘dirty’ assets, we advised shareholders to oppose the activist’s proposal,” Glass Lewis said.

The adviser also pointed to its review of a campaign launched by activist investor Carl Icahn against McDonalds, which claimed that the company had failed to meet a pledge over eliminating gestation crates from its pig supply chain.

“Following our review and engagement with the parties, we concluded Mr Icahn had presented an insufficient case to warrant the proposed boardroom changes,” Glass Lewis said. “In the end, Mr Icahn’s campaign at McDonald’s was nothing short of an abject failure in terms of shareholder support,” it added, with the activist’s two director nominees receiving less than 2 per cent of votes cast.

‘Anti-climate finance’

Momentum against ESG is increasing among Republican lawmakers in the US. Governor of Florida Ron DeSantis – a frontrunner to secure the Republican nomination for the 2024 presidential election – is among the prominent figures to have ordered state fund managers and asset managers operating in their districts to prioritise returns and exclude ESG from their considerations.

Earlier in January, the world’s largest asset managers, including BlackRock and Vanguard, were accused by non-profit ShareAction of having blocked ESG-focused shareholder proposals.

One asset manager, who did not wish to be named, told Sustainable Views that the firm would have lost its licence to operate in the US had it backed 100 per cent of shareholder proposals, in the face of mounting political opposition to ESG in some states.

At Davos in January, former US vice-president Al Gore acknowledged this opposition when he spoke out against “anti-climate finance”. He told a panel on decarbonisation: “In my home city of Nashville, Tennessee, a new more efficient, lower carbon transportation plant was defeated because a fossil fuel company came in and, with disguised formulas, financed the opposition to it.”  

Kristina Wyatt, a former senior counsel for climate and ESG at the US Securities and Exchange Commission, told Sustainable Views that while the anti-ESG movement was “not helpful”, investors would see past this opposition.

“I don’t think that the sophisticated investors are fooled by this. There’s a bit of bullying going on, there’s a bit of intimidation in this sleight of hand,” said Wyatt, who is now deputy general counsel at carbon accounting platform Persefoni.