State Treasurers Demand Answers on How Asset Managers Vote Their Pension Shares

ESG is 'most severe breach of the fiduciary standard in American history,' they say Amid claims of “a historic breach of fiduciary duty,” by some of Wall Street’s top firms, state treasurers issued a letter last week to 20 of America’s largest asset managers, demanding an accounting of how they have voted the state employees’ corporate shares that they control. In a May 15 Wall Street Journal op-ed, the letter’s authors, Utah Treasurer Marlo Oaks and Oklahoma Treasurer Todd Russ wrote that “many American workers don’t realize that their hard-earned money is being used against them. “Firms whose job is to deliver investment returns are instead weaponizing retirement funds, public pensions, and other investments in pursuit of nakedly ideological goals,” they stated. “It is perhaps the most severe breach of the fiduciary standard in American history.” When state workers invest in pension funds managed by third-party asset managers, those asset managers are able in many cases to vote those shares on investors’ behalf, which is known as proxy voting. Given that about 80 percent of shares in corporations in the S&P 500 index are held through institutional asset managers rather than directly by individual investors, this gives a small number of organizations outsized power to control corporate boards, management, and policies. Many of these institutional investors have joined international clubs like the World Economic Forum, Climate Action 100, the Glasgow Financial Alliance for Net Zero (GFANZ), and the United Nations-sponsored Net Zero Asset Managers initiative (NZAM), which include pledges to support progressive causes across their investment portfolios. These progressive causes come under the umbrella ideology of the Environmental, Social, and Governance (ESG) movement, which includes issues like climate change, critical race theory, and abortion rights. “We want these managers to know we are watching, and it’s something that legislators, governors, treasurers, even AGs have raised issues about,” Oaks told. State officials also reached out to the world’s two largest proxy agents, Institutional Shareholder Services (ISS) and Glass Lewis, who advise shareholders how to vote or vote on shareholders’ behalf. These two firms together have a controlling share of the proxy advisory industry, together comprising 97 percent of the market. “Proxy voting is really where ESG gets pushed into the corporations,” Oaks said. “So if an investment manager is supporting proxy proposals that are non-pecuniary, not financially material, that are generally political issues, then by definition they are voting those shares against the interests of the people in all of our states.” The letters, signed by financial officers from 18 states, went out to the proxy managers as well as asset managers, and cited a number of recent ESG shareholder proposals. These include a proposal to “require oil companies to pledge fealty to the Paris Climate Agreement, social media companies to crack down on ‘hate speech,’ insurance companies to consider race in underwriting insurance policies, and retailers to take a position on abortion policy,” the state officials wrote. Did Their Votes Benefit Investors? The letter asks the asset managers and proxy agents to explain, among other things, whether they have voted to force companies to undergo racial or environmental audits, what their process is for deciding how to vote investors’ shares, what global clubs they have joined and what commitments they have made to them, whether or not they earn fee income from ESG consulting services, if they have voted in favor of ESG initiatives, and if so what evidence they have that ESG initiatives benefit shareholders and pensioners. A report in the New York Post this week calculated that the collapse of Silicon Valley Bank (SVB), which was a strong advocate of ESG’s climate and racial principles and had a diversity officer in place but no senior risk officer for most of the year leading up to its collapse, cost New York City pension funds about $30 million. While depositors in SVB were bailed out even beyond the $250,000 FDIC limit, shareholders, which include public workers and retirees, were not. New York City pension funds that lost money on SVB included New York’s Teachers Retirement System (which lost $15,804,413); the New York City Employees’ Retirement System ($12,930,936); and the Police Pension Fund ($8,967,580). Asked what he hoped to achieve with the request, Louisiana Treasurer John Schroder told , “I would like to see asset managers only vote in the pecuniary interests of their clients, unless their clients have specifically asked them to vote in favor of ESG initiatives.” Recent reports from the Wharton Business School and Standard & Poor’s, which provides ESG ratings, have calculated that states that attempt to boycott Wall Street banks that support ESG could end up paying up to $700 million in higher interest rates

State Treasurers Demand Answers on How Asset Managers Vote Their Pension Shares

ESG is 'most severe breach of the fiduciary standard in American history,' they say

Amid claims of “a historic breach of fiduciary duty,” by some of Wall Street’s top firms, state treasurers issued a letter last week to 20 of America’s largest asset managers, demanding an accounting of how they have voted the state employees’ corporate shares that they control.

In a May 15 Wall Street Journal op-ed, the letter’s authors, Utah Treasurer Marlo Oaks and Oklahoma Treasurer Todd Russ wrote that “many American workers don’t realize that their hard-earned money is being used against them.

“Firms whose job is to deliver investment returns are instead weaponizing retirement funds, public pensions, and other investments in pursuit of nakedly ideological goals,” they stated. “It is perhaps the most severe breach of the fiduciary standard in American history.”

When state workers invest in pension funds managed by third-party asset managers, those asset managers are able in many cases to vote those shares on investors’ behalf, which is known as proxy voting. Given that about 80 percent of shares in corporations in the S&P 500 index are held through institutional asset managers rather than directly by individual investors, this gives a small number of organizations outsized power to control corporate boards, management, and policies.

Many of these institutional investors have joined international clubs like the World Economic Forum, Climate Action 100, the Glasgow Financial Alliance for Net Zero (GFANZ), and the United Nations-sponsored Net Zero Asset Managers initiative (NZAM), which include pledges to support progressive causes across their investment portfolios. These progressive causes come under the umbrella ideology of the Environmental, Social, and Governance (ESG) movement, which includes issues like climate change, critical race theory, and abortion rights.

“We want these managers to know we are watching, and it’s something that legislators, governors, treasurers, even AGs have raised issues about,” Oaks told .

State officials also reached out to the world’s two largest proxy agents, Institutional Shareholder Services (ISS) and Glass Lewis, who advise shareholders how to vote or vote on shareholders’ behalf. These two firms together have a controlling share of the proxy advisory industry, together comprising 97 percent of the market.

“Proxy voting is really where ESG gets pushed into the corporations,” Oaks said. “So if an investment manager is supporting proxy proposals that are non-pecuniary, not financially material, that are generally political issues, then by definition they are voting those shares against the interests of the people in all of our states.”

The letters, signed by financial officers from 18 states, went out to the proxy managers as well as asset managers, and cited a number of recent ESG shareholder proposals. These include a proposal to “require oil companies to pledge fealty to the Paris Climate Agreement, social media companies to crack down on ‘hate speech,’ insurance companies to consider race in underwriting insurance policies, and retailers to take a position on abortion policy,” the state officials wrote.

Did Their Votes Benefit Investors?

The letter asks the asset managers and proxy agents to explain, among other things, whether they have voted to force companies to undergo racial or environmental audits, what their process is for deciding how to vote investors’ shares, what global clubs they have joined and what commitments they have made to them, whether or not they earn fee income from ESG consulting services, if they have voted in favor of ESG initiatives, and if so what evidence they have that ESG initiatives benefit shareholders and pensioners.

A report in the New York Post this week calculated that the collapse of Silicon Valley Bank (SVB), which was a strong advocate of ESG’s climate and racial principles and had a diversity officer in place but no senior risk officer for most of the year leading up to its collapse, cost New York City pension funds about $30 million. While depositors in SVB were bailed out even beyond the $250,000 FDIC limit, shareholders, which include public workers and retirees, were not. New York City pension funds that lost money on SVB included New York’s Teachers Retirement System (which lost $15,804,413); the New York City Employees’ Retirement System ($12,930,936); and the Police Pension Fund ($8,967,580).

Asked what he hoped to achieve with the request, Louisiana Treasurer John Schroder told , “I would like to see asset managers only vote in the pecuniary interests of their clients, unless their clients have specifically asked them to vote in favor of ESG initiatives.”

Recent reports from the Wharton Business School and Standard & Poor’s, which provides ESG ratings, have calculated that states that attempt to boycott Wall Street banks that support ESG could end up paying up to $700 million in higher interest rates on municipal debt. With the collapse of investment banks Bear Stearns and Lehman Brothers in the mortgage crisis, and Credit Suisse in the current banking crisis, capital markets have become increasingly concentrated in an ever smaller number of surviving institutions such as JPMorgan Chase, Citibank, Goldman Sachs, Wells Fargo, Morgan Stanley, and Bank of America.

To the extent that the majority of these institutions sign on to the ESG agenda, states are left with few alternatives if they want to borrow money. But state officials say, when it comes to asset managers, they have more alternatives.

“Of course there are options,” Schroder said. “It’s a highly competitive market. We can hire an asset manager that agrees to only vote in the pecuniary interests of the state.”

Financial officers from the following states signed on to the letter: Alaska, Arizona, Florida, Idaho, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Oklahoma, South Carolina, Utah, West Virginia, and Wyoming.

In addition to ISS and Glass Lewis, the state treasurers sent letters to the following asset managers: BlackRock, Vanguard, Fidelity, UBS, State Street, Morgan Stanley, JPMorgan Chase, Credit Agricole, Allianz, Capital Group, Goldman Sachs, Bank of New York, Amundi, PIMCO, Legal & General, Edward Jones, Prudential, Deutsche Bank, Bank of America, and Invesco.

ISS and Glass Lewis were contacted for comment regarding this article, but did respond.