ATR Supports Rep. Bryan Steil’s Putting Investors First Act
While state financial officers have received a lot of attention when it comes to combatting environmental, social, and governance (ESG) standards, Congressional Republicans are also gearing up to depoliticize investing and proxy voting. Last week, Rep. Bryan Steil (R-Wis.) reintroduced the Putting Investors First Act (H.R. 448), which would require proxy advisory firms to be more transparent about their business practices.
Americans for Tax Reform supports the swift passage of H.R. 448.
This bill will shed light on how proxy advisors are involved in pressuring public companies to analyze and deliberate issues that lack relevance to their financial performance and fail to improve shareholder value.
Rep. Steil, who is a member of the House Committee on Financial Services, originally introduced the Putting Investors First Act last year (117th Congress; H.R. 9527).
The two major proxy advisors, Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis), provide proxy voting advice and analytics to institutional investors, such as asset management firms and pension fund boards. The firms control “more than 90% of the proxy advisory market [and] have assumed outsize influence over corporate voting matters.” Proxy advisory firms assert significant influence over institutional investors when voting on shareholder resolutions that impact the broader managerial issues affecting a company. The status quo gives credence to political shareholder proposals that fail to offer true financial benefits to investors.
Rep. Steil’s bill would, among other things, require proxy advisors to register with the Securities and Exchange Commission (SEC), mandate greater transparency on the fees ESG funds charge investors, and prohibit institutional investors from automatically voting identically with the recommendations posed by the proxy advisors (e.g., robovoting).
The bill would require proxy advisors to submit an application to the SEC and disclose among other line items, “the procedures and methodologies that the applicant uses in developing proxy voting recommendations.” The bill also makes clear that the methodologies must be publicly available.
This transparency requirement is similar to previous calls by former Senator Pat Toomey (R-Pa.) to uncover the methodologies by which ratings firms such as S&P Global, Sustainalytics, and MSCI determine which companies qualify for their ESG indexes, and how ESG credit indicators are applied to municipal bond issuances.
The arbitrary nature of what counts as “ESG compliant” necessitates expanded disclosure requirements for usage by board directors, retail investors, and retirees.
The bill also requires the proxy advisors “to publicly disclose and manage any conflicts of interest that arise or would reasonably be expected to arise from such business.”
Earlier this month, twenty-one state attorneys general penned a letter to ISS and Glass Lewis outlining their concerns with the potential conflicts of interest due to their association with international climate groups such as Climate Action 100+.
The letter points out the conflict between the proxy advisors’ ESG investing services and advisory services:
Your pursuit of net zero also potentially creates a conflict of interest between your company’s interests and some of your clients’ interests. Most obvious is that each of you offers a substantial number of services related to ESG investing. The value of these services would be undermined if you were to admit in your advisory services that ESG factors are not material to a firm’s financial performance. Such a blatant conflict of interest calls into question every recommendation you make related to ESG issues.
Additionally, asset managers and pension funds that use proxy advisors must annually report to the beneficial owners of fund shares (e.g., retirees), (1) the percentage of votes cast that are based on proxy advisor recommendations, and (2) the percentage of votes cast on ESG-related shareholder proposals that follow proxy advisors’ recommendations. For the ESG-related proposals, asset managers and pension funds would also be required to explain how they use the proxy advisors’ recommendations, how the recommendations are reconciled with the fiduciary duty to vote in the “best economic interests of shareholders,” how frequently votes are changed, and if investment professionals with the asset manager or pension fund are involved in the voting decisions.
If the bill is enacted, ESG index fund managers would be required to disclose a comparison of their returns and fees to other “broad-based” index fund products that consider only pecuniary factors. Research from Boston College shows that non-ESG “Vanguard funds generally outperform their ESG counterparts, often by a considerable margin.” This transparency requirement could provide evidence that ESG funds charge higher fees and offer lackluster returns compared to non-ESG funds.
The bill also addresses resubmission of extraneous ESG-related shareholder proposals under Securities Exchange Act Rule 14a-8. Reps. John Rose (R-Tenn.), Pete Sessions (R-Texas), and Steil sent a letter to the SEC inquiring about the excessive frequency of extraneous ESG shareholder proposals appearing on proxy solicitation materials.
Cosponsors of Rep. Steil’s bill include Reps. Andy Barr (R-Ky.), Warren Davidson (R-Ohio), Mark Amodei (R-Nev.), Carlos Gimenez (R-Fla.), Drew Ferguson (R-Ga.), Mike Flood (R-Neb.), David Joyce (R-Ohio), John Rose (R-Tenn.), Daniel Meuser (R-Pa.), Scott Fitzgerald (R-Wis.), Elise Stefanik (R-N.Y.), and French Hill (R-Ark.).
Members of Congress should support and vote for passage of H.R. 448.