[co-author: Stephanie Kozol]
On January 17, Utah Attorney General Sean Reyes (R), on behalf of a 21-state coalition, sent a letter to the CEOs of the two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Company. The letter alleged the proxy advisors potentially violated their legal and contractual duties to advisees by “pledg[ing] to recommend … against” proposals that failed to implement environmental and social goals adequately. The letter also requested written assurances to cease the potential violations.
Proxy advisors like ISS and Glass, Lewis & Company must follow federal and state laws, as well as abide by investment contract terms with state investment vehicles. In his letter, AG Reyes reminded the companies of their responsibility to (1) abstain from providing recommendations that contain false or misleading information; (2) maintain duties of care and loyalty for proxy voting; (3) abstain from engaging in unfair or deceptive trade practices; and (4) consider only those factors related to the economic value of the investment under the proxy advisors’ agreements with state investment vehicles.
Yet, rather than advising shareholders based solely on economic value, AG Reyes claimed the firms instead balanced environmental and social factors outside their purview in making investment decisions. He then provided evidence that the firms prioritized environmental and social factors. For example, AG Reyes cited ISS’ own declaration that it would generally vote against directors who fail to implement net-zero emissions goals adequately. ISS allegedly made the declaration even though “it is far from certain that [achieving net-zero emissions] will occur.” And considering that “no rational actor would incur the massive expense” to achieve net-zero emissions absent a government mandate, AG Reyes concluded that the company must be acting “consistent with [its] political beliefs” and “contrary to [the] duty to focus on a company’s financial interests.”
Why It Matters
Since early 2022, Republican AGs have challenged the ESG movement and explored various legal arguments to eliminate the practice among asset managers, utilizing the ESG practice with public funds management. While AG Reyes’ letter denotes the latest phase of this saga, Republican challenges to the ESG movement will likely continue for the foreseeable future. Accordingly, companies that manage public funds and implement ESG policies/practices should carefully consider whether their use of ESG could be construed as state or federal law violations.
