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May 16, 2024

How Did We Get Here? Proxy Voting on ESG Proposals

The Wall Street Journal editorial board is highlighting today a new report from the Committee to Unleash Prosperity, which indicates a sharp drop-off in institutional investor support for ESG proposals in 2023 as compared to 2022. The Committee to Unleash Prosperity, in case you were wondering, was co-founded by conservative writer Stephen Moore, economist Arthur Laffer, financial news commentator Larry Kudlow and publisher and politician Steve Forbes. The stated mission of the Committee to Unleash Prosperity is “to educate policy makers and the public about government policies that have been proven, in practice, to maximize economic growth and equitable prosperity in America and around the world.”

The WSJ editorial board notes that the report indicates some significant retrenchment on the part of large funds with respect to ESG proposals:

The news this year is that some of the funds are backtracking. The latest report finds that support for ESG resolutions dropped 25% in 2023 from 2022, including a 30% drop among the 25 most active fund families. Progressive shareholders—often with only a few shares—are putting forward more proposals than ever, trying to pressure executives into adopting their causes as corporate policy. But non-ESG-branded funds aren’t backing them like they were a year ago.

The WSJ piece attributes the change in part to a reluctance on the part of some funds to follow ISS and Glass Lewis recommendations on ESG proposals, stating:

One cause of the shift is asset managers’ growing reluctance to follow the direction of the proxy-adviser duopoly, Institutional Shareholder Services (ISS) and Glass Lewis. The firms claim about 97% of the market for guidance on shareholder votes, and they back ESG at an overwhelming rate. Both earned lower grades than most of the funds they advise—a D for Glass Lewis and an F for ISS. Until last year most fund managers seemed to accept the duopoly’s recommendations as gospel.

Today more fund executives are second-guessing the proxy advisers’ guidance. “It is increasingly clear that proxy advisers have undue influence,” wrote JP Morgan CEO Jamie Dimon in his April letter to shareholders. His firm’s asset-management arm was among the dozens that rejected more ESG proposals last year, and he suggested that managers ought to do more of their own research on how to vote.

The WSJ editorial board concludes that “[t]he funds rejecting ESG are embracing their responsibility to investors. All asset managers have a fiduciary duty to maximize returns, and that includes their approach to proxy voting.”

On a side note, I studied economics as an undergraduate and had plans to go on to get a PhD and become an economist, but bailed on that plan when I opened up the “subject test” part of the GRE exam. I am pretty sure the first question in the test had something to do with the Laffer Curve, which was developed by Arthur Laffer to depict the theoretical relationship between rates of taxation and the resulting levels of the government’s tax revenue. Reading that question made me decide then and there that I had absolutely no interest in being an economist, so I turned the test in unfinished and left the building. So, for that career twist that saved me from a life of debating how many angels can dance on the head of a pin, I am indebted to Arthur Laffer!

– Dave Lynn

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