House Republicans on Sept. 10 warned of what they said is an outsized influence from proxy-advisory firms on the institutional investors they work with, specifically when it comes to ESG-related proposals.
“Proxy-advisory firms have been given immense power to shift policy, often using a one-size-fits-all framework to promote a liberal, social agenda,” said Subcommittee Chair Bill Huizenga, R-Mich., in his opening statement before the House Financial Services Subcommittee on Oversight and Investigations.
Charles Crain, vice president of domestic policy at the National Association of Manufacturers, agreed with Huizenga, contending in his own opening statement that “proxy firms are powerful, unaccountable actors that pose a real threat to Americans’ financial security.”
Crain was critical of the SEC under Chair Gary Gensler, which in 2021 rescinded Trump-era proxy-voting rules that the SEC first proposed under former Chair Jay Clayton. In June, a federal appeals court in New Orleans ruled that the SEC’s rescinding of that rule was “arbitrary and capricious,” sending the rule’s “notice-and-awareness conditions” provision back to the SEC. That provision required proxy firms to provide their voting advice to their clients and companies at the same time.
At the hearing, Crain told lawmakers, and many Republicans agreed, that there is a “conflict of interest” when proxy-advisory firms recommend voting in favor of ESG initiatives.
After recommending approval of an ESG initiative, proxy firms are then “getting to double dip by consulting with the company on how to implement the initiative,” Huizenga said.
Democratic lawmakers disputed these statements, as did Illinois State Treasurer Michael Frerichs, a Democrat who serves as vice chair of the Illinois State Board of Investment, managing over $26 billion in pension assets for state employees.
“Climate is financial risk; to not actively plan for climate change is to set your company up for failure,” said Rep. Sylvia Garcia, D-Texas, at the hearing. “Shareholders and asset managers are aware of this fact; that is why they ask their proxy advisers to include ESG as a factor as they craft their voting recommendations.”
Garcia asked Frerichs, “Have you heard anything so far that leads you to believe that there's conflicts of interest out there, and that nobody's doing anything about it?”
“I’ve seen no conflicts of interest in our investing,” Frerichs responded, adding that he works with proxy firms because there is a need for them.
“There are tens of thousands of votes that come up a year. ... We can't hire enough people to do this; it would be inefficient,” Frerichs said. “This is a market efficiency here. These proxy-advisory firms have sprung up to help investors like us (and) provide access to data, but we work with them (on) our guidelines.”
Frerichs said he follows up with his proxy advisers on a quarterly basis, adding, “We vote based on data and research, and we use proxy-advisory firms to help sift through mountains of data.”
