The recent cacophony of political commentary on whether investors and their managers must or cannot consider Environmental, Social and Governance (ESG) factors in the investment process has been deafening. As the leading professional voice on financial analysis and investor protection for over sixty years, we suggest all pundits who insist on forcing the profession to pick sides in this political skirmish listen to what investors actually think.
It is disheartening to see how individual investors, investment managers, stock selection, asset allocation and retirement security have become pawns in the political disfunction over climate change. It is the sort of thing that causes the public to distrust politicians. Political leaders on all sides mislead the public on important aspects of free markets and investor protection. It’s time to listen to what investors have to say.
Fiduciary Duty Ping-Pong
Politicians are now invoking constant changes on what fiduciary duty prohibits or requires regarding the consideration of ESG factors in the investment and proxy decision-making process. It has become an extremely harmful and unsettling condition for managing fiduciaries such as pension trustees, investment professionals and ultimately retirement savers.
Endless reinterpretations of what does or does not meet fiduciary duty when it comes to integrating ESG factors into the investment process is a free market intervention of the worst order. The result has been politicians — not investment professionals or their clients — declaring what is truthful, material, and relevant for purposes analyzing and making investments. Should a real estate investor in Florida not factor in the potential impact of rising sea levels? Is the suggestion that they be prohibited from doing that because it may pertain to climate change?
Proxy Voting & Corporate Governance
Politicians are now asserting that proxy voting and/or the filing of shareholder proposals regarding ESG issues must be handled in a manner that comports with their political narrative. The fact is the proxy process remains foundational to corporate governance in the US because it holds corporations and their boards accountable on everything from executive compensation to conflicts of interest to corporate integrity. In other words, the proxy process is a hallmark of US investor protection.
If investors are forced to decide on competing political narratives about proxies and corporate governance it makes for a sharp distinction, particularly when it comes to ESG proxy matters. On the one hand, politicians are directing fiduciaries to reject ESG-related proxy matters because they are non-pecuniary, a complete distraction, or even “punishment” for corporate management. On the other hand, some politicians are demanding fiduciaries support these same ESG-related proxy matters and even file shareholder proposals that advance the fight on global warming.
When political narratives end up controlling or usurping proxy voting decisions on ESG — or any other governance issue for that matter — plan fiduciaries are stripped of their independence and professional judgment for the sake of current politics. We worry, as do investors, that our entire system of corporate governance in this country is being undermined.
Analyst Independence
Finally, political narratives are reigniting views that research and analysis by professional analysts is inaccurate and cannot be trusted depending on how the analyst treats ESG factors. It is creating a resurgence of analyst retaliation where buy/sell recommendations or proxy voting recommendations do not match prevailing ESG politics.
When it comes to research and analysis, our organization stands as the global authority on professional ethics, analyst independence and research integrity. These attributes are key features of a true profession and the foundation of free and fair markets. Normally, analysts consider all manner of information in issuing research and given their fiduciary obligations to investors, investment managers must be free to use their professional judgement in deciding what recommendations to make to investors.
For decades, analysts have weathered retaliation from companies who detest research opinions warning of poor earnings, poor prospects or making the dreaded sell recommendation. Add to that mix, any proxy research opinions against management, particularly on ESG matters.
Invariably, analyst retaliation starts with denigrating the analyst’s skills and experience, the rigor of analytical models they use, and of course, “inaccuracies” in negative opinions. Unwelcome ESG recommendations are now repeating that familiar soundtrack — inaccurate, untrustworthy and not in the interest of underlying investors. Political narratives as a substitute for analyst independence and research objectivity will destroy free markets.
Listen to Investors
It is time for politicians to leave markets and investors to do what they do best – make their own determinations as to which factors are relevant for their investment and proxy choices. Trying to control it through any political agenda, say pro or anti ESG, is fraught, and a denunciation of free markets and investor rights. It ultimately hurts everyone, even those running for reelection.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.