My last blog post discussed the risks that ESG investing creates for CalPERS and CalSTRS. If not addressed, then both taxpayers and public employees will bear unnecessary costs and risks. Unfortunately, SEC rules are making this problem even worse.
The SEC requires all institutional investors, such as CalPERS and CalSTRS, to vote on all matters put forth in proxy statements, or the measures voted on during shareholder meetings. For most institutional investors keeping up with all of these issues is not feasible, so they turn to proxy advisory firms.
Proxy advisory firms help institutional investors wade through the overwhelming numbers of measures, and two proxy advisory firms, ISS (an arm of Genstar, a private equity firm) and Glass Lewis (an arm of the Ontario Teacher’s Pension Plan Board and the Alberta Investment Management Corporation) control 97 percent of the proxy advisory market.
Both ISS and Glass Lewis sponsor ESG programs; consequently, the firms have a pre-ordained belief that pro-ESG proxy statements should be supported. Thus, their advice has clear bias on ESG issues that is not adequately disclosed.
As my last blog argued, ESG investing is inappropriate for public pension funds such as CalPERS and CalSTRS. However, it is unclear that either ISS or Glass Lewis account for the specific needs of public pension funds when advising California’s public pension funds on ESG issues. In fact, based on their own ESG programs, it is reasonable to conclude that both firms are biased toward supporting such programs despite the clear negative impact these policies have on California’s public pension funds.
Therefore, reforms that better align the interests of the proxy advisory firms and the interests of fund shareholders are needed.
For instance, instead of assuming that the analyses of proxy advisory firms are objective, or allowing the proxy advisory firms to rely on their “general conflict of interest” statements, the SEC should require conflict of interest disclosures that are specific to the issue under evaluation. More relevant conflict of interest disclosures will help ensure that California’s public pension funds are explicitly made aware of the proxy firm’s specific biases and potential conflicts of interest as it relates to the specific issue under consideration.
The SEC should also consider eliminating the requirement that institutional investors (like California’s public pension funds) vote on all items on corporate proxy statements. Enabling CalPERS and CalSTRS to focus on only those corporate proxy statements they deem material would reduce the artificial demand for the proxy advisory services, and therefore improve the competitive environment.
The SEC’s regulations as it relates to proxy statements is a classic example of obscure government regulations creating large financial consequences. While current leadership at these pension funds may object, reforming the current proxy process is imperative to reduce the unnecessary risks these regulations are imposing on California’s taxpayers and public-sector employees.
Dr. Wayne Winegarden is a Senior Fellow in Business and Economics at Pacific Research Institute. He is also the Principal of Capitol Economic Advisors.