Climate change activists have been flexing their muscle from Washington over US business interests for years. From green energy investment quotas to bans on oil and gas expansion, their agenda took hold in all corners of the corporate world but found a particularly receptive audience in the financial services sector.
However, due in large part to the continued effort of lawmakers at the state level and the re-election of President Donald Trump, the green lobby’s power in the financial services industry is beginning to fade.
Major asset managers and US banks have departed from climate groups and initiatives such as Climate Action 100+ and the Glasgow Financial Alliance for Net Zero, including both the Net Zero Asset Managers Initiative and the Net Zero Banking Alliance.
These are welcome and essential moves to get our country’s asset managers back to their intended purpose of meeting their fiduciary duty and ensuring strong earnings based on financial factors. While these departures should be celebrated, there are still powerful actors influencing the proliferation of environmental, social, and governance agendas: proxy advisers.
On its face, the idea of a proxy adviser seems to make sense. Independent, third-party firms were created to make it easier for shareholders to evaluate the hundreds of proposals they are asked to vote on each year.
The idea is simple, but, like much in life when Washington special interests get involved, the industry is far from sensical or independent.
Before I left Congress, I warned in 2018 that “proxy advisory firms have shown way too often that they are more focused on pushing special interest agendas rather than serving investors.”
Sadly, little has changed over the last seven years.
In a financial ecosystem dominated by passive investing, proxy advisers have become an even bigger issue as companies are forced to cater to these little-known shops instead of being accountable to shareholders. Not only does the current system encourage poor corporate governance, but it also makes it easier for businesses to shirk their responsibility to engage shareholders directly, which would present its own set of legal and regulatory issues.
This is made even more concerning given the concentration in the proxy market. Today the proxy industry, its size and importance notwithstanding, has morphed further into a duopoly that serves as quasi-regulators, despite having no statutory authority.
Glass Lewis and the Institutional Shareholder Services control approximately 97% of the proxy advisory market. These firms recommend how to cast votes for issues from the approval of large pay packages to corporate takeovers to board diversity. They also remain strong proponents for ESG issues.
According to a 2022 report from the shareholder advocacy group ShareAction, ISS recommended voting in favor of ESG resolutions 75% of the time, while Glass Lewis recommended voting in favor 42% of the time. In 2024, Glass Lewis and ISS maintained similar support for environmental and social shareholder resolutions.
This is a stark contrast to the “Big Three” asset managers—State Street, BlackRock, and Vanguard—whose support of environmental and social initiatives plunged to 16%, 4%, and 0% respectively last year after their leadership recognized the effect of the public pressure over much of the ESG agenda.
State financial officers also have taken on the mantle of pushing back against proxy advisors. In September 2024, 16 SFOs sent a letter to the heads of ISS, requesting it “make a much-needed course correction following a recent report showing that your benchmark policy is fundamentally out-of-step with the larger market.”
The report found that ISS supported ESG proposals at 500% the market rate of 37%. Similarly, separate investigations have been launched by both the US House of Representatives’ Judiciary Committee and Florida Attorney General James Uthmeier to examine the antitrust implications resulting from the power of these groups.
In contrast, large asset managers have been more responsive to the market. BlackRock and Vanguard have expanded their voting choice options for investors to include Egan-Jones’ “wealth-focused” policy option. This policy aims to enhance and protect investor’s wealth and doesn’t prioritize social or environmental goals.
While these developments are certainly positive, it’s not clear how this will affect the upcoming proxy season—especially given research that shows the current proxy adviser duopoly can sway proxy votes by as much as 30%.
The only true way to address the problem of proxy advisers is to further bring attention to voting habits, investigate their inherent conflicts of interest, and change the way they are treated by the Securities and Exchange Commission.
Luckily for investors on that last point, President Donald Trump has appointed someone to lead the SEC with a keen understanding of the challenges the industry faces.
In 2018, when talking about what he called “the proxy plumbing system,” Paul Atkins said it was time for the SEC to focus on the “power, lack of transparency that [proxy advisers] have, and the underlying rules that create this.” Under Atkins’ leadership of the SEC, they will be able to do just that.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Jeb Hensarling is a former congressman from Texas and is an advisory council member to Americans for Prosperity and an economics fellow at the Cato Institute.
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