Anti-ESG campaign: defending fiduciary duty or a crusade against shareholder activism?
The media have been reporting on the existing confrontation between institutional investors and proxy advisors on one side, and Republican states in the United States on the other, regarding ESG (environmental, social, and governance) aspects and DEI (diversity, equity, and inclusion) policies of the companies they invest in.
On July 29, 26 state officials from 21 Republican states in the United States signed a letter (not the first) demanding that 18 major asset managers reduce their ESG investment-related activities (for example, rejecting climate mandates like 'net zero' or the CSRD Directive) in order to continue doing business with these states. They also demanded the disclosure of 'all affiliations and collaborative initiatives (for example, Climate Action 100+, GFANZ, PRI) that could influence investment strategy or engagement priorities.' The letter also criticized the 'erosion of the traditional fiduciary duty' and set a deadline until September 1 for the managers to clearly demonstrate 'their commitment to a fiduciary model focused on financial integrity, not on advocating political causes.'
These arguments were rebutted in a letter dated August 15, signed by 17 Democratic officials: 'the fiduciary duty, correctly understood, requires —it does not prohibit— that investors consider substantial risks and long-term opportunities. Institutional investors, including public pension funds, are long-term owners.'
On the other hand, the three main asset managers (BlackRock, State Street, and Vanguard) are facing an antitrust lawsuit filed in Texas by 13 Republican states, alleging that they have violated U.S. antitrust law by engaging in climate activism, joining investor initiatives like Climate Action 100+, and using shareholder advocacy as an excuse to influence coal production and energy prices.
Speaking of institutional investors involves talking about proxy advisors, entities that advise them on how to vote at shareholder meetings, given the large volume of investments they manage and the abundant information they need to analyze for each company. The largest are the American firms ISS (Institutional Shareholder Services) and Glass Lewis, along with the Swiss firm Ethos, the British firms PIRC and Minerva, and a few others.
The state of Texas has passed a law requiring proxy advisors to be more transparent about their voting recommendations, including those based on environmental, social, or governance (ESG) criteria, diversity, equity, or inclusion (DEI), and sustainability scores. Specifically, it requires voting advisors to explicitly state in these cases that their advice 'is not provided solely for the benefit of the company's shareholders' and to provide financial analyses that support their recommendations. Its entry into force is scheduled for September 1, 2025.
This rule has been challenged by several leading proxy advisors. In turn, the attorneys general of California and other Democratic states have urged the Trump administration to abandon its plan to lift limits on greenhouse gas emissions, as it is based on a scientifically questionable report. Furthermore, civil rights organizations have protested against the intention to reduce funding for the Smithsonian Institution if it does not comply with their demand to reinterpret its view of the country's history of slavery, which they consider 'anti-American ideology.'
Regarding the stakeholders, there are different views. In respective op-eds published in the Financial Times, the CEO of Minerva indicates that the anti-ESG reforms approved in the United States are not impartial regulatory improvements but instead aim to transfer power from shareholders to company management (according to Minerva, since 2021, 56 anti-ESG laws have been approved in 22 states in the United States), while the chairman of the board of the Swiss investor Vontobel believes that imposing them in favor of ESG investments over others might create a conflict with their fiduciary responsibility to optimize their clients' profits.
In a letter dated August 27, BlackRock responded to the aforementioned letters from July 29 and August 15, stating that 'these letters continue a concerning trend by both parties to politicize the management of public pension funds,' and concluded with the following warning: 'As an increasing number of studies continue to demonstrate, politicizing the management of pension funds ultimately has a cost for savers and retirees.'
From the above derives the role that institutional investors should (or should not) play in the management of companies and through which mechanisms. And in a broader sense, it raises the question of what the role of owners of large listed companies is today. But this is another matter.
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