TPPF’s Life:Powered has released a new study highlighting the infiltration of Environmental, Social, and Governance (ESG) activism into state retirement systems. The research underscores a trend where ESG activists leverage major asset managers and proxy voting firms to promote progressive agendas over prudent financial stewardship.
Over the past decade, the investment landscape has been reshaped by the ESG movement. Today's ESG activists are advancing a politically charged agenda that includes climate change and social issues such as abortion and gun rights. This shift is particularly concerning given the consolidation in the investment industry, with up to 20% of voting shares in many public companies controlled by just three firms—Vanguard, BlackRock, and State Street—who market ESG funds to boost profitability amid a competitive market.
The concentration in the proxy voting advisory market compounds this issue. Two firms, Institutional Shareholder Services Inc. (ISS) and Glass Lewis, dominate over 90% of the market share. These firms have become key enablers of ESG-driven shareholder resolutions, further entrenching political activism within corporate governance.
Brian Phillips Chief Communications Officer (TPPF)
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Public pensions, including the California State Teachers’ Retirement System (CalSTRS) and the California State Employees’ Retirement System (CalPERS), are leading in adopting ESG principles. However, even those claiming neutrality are often influenced by advisors advocating for these trends. Alarmingly, state pensions support more environmentally-focused resolutions on average than major asset managers, suggesting a broader shift towards activism over fiduciary responsibility.
In response to this threat, over 20 states have enacted measures to protect their investments from ESG pressures. Yet more rigorous action is needed. States must codify statutes preventing pensions from endorsing social or political agendas through their investment strategies and proxy votes. Specifically:
- Adopt Custom Proxy Voting Policies: Ensure all proxy votes align strictly with fiduciary standards.
- Implement Third-Party Audits: Subject proxy voting and corporate engagement to independent review.
- Revoke Authority from Non-Compliant Managers: Remove proxy voting and investment management powers from asset managers failing to adhere to fiduciary duties.
These measures aim to fortify state pensions against political activism encroachment, safeguarding investment returns and supporting American businesses' health.
The investment landscape must remain focused on maximizing returns for stakeholders rather than advancing political or social agendas. By reinforcing fiduciary responsibility and resisting ESG activism encroachment, state pensions can uphold their duty to beneficiaries and contribute to a more stable economy.
