There must be some misunderstanding

What does it mean to be an ESG skeptic?

In my new book, ESG Mindset, I have written several times about the US SEC or the Securities and Exchange Commission. It was hard not to because it influences material issues that a company reports. One thing I don’t write about, however, is the amendments to the SEC rule 14A-8, which were passed in 2022.

Buckle in because this one is going to get crazy and a bit personal.

One of the things I write about in the book is using the power of proxy voting to influence public companies. Shareholders can do this to influence companies to behave in specific ways and critically (albeit seemingly undervalued) vote directors out. If you aren’t familiar with it, investors can bring non-binding shareholder resolutions up for a vote at the company’s Annual General Meeting (AGM), which is the season we’re currently in.

The SEC amended the rule that allows what can be proposed. Previously:

Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.

However, the amendment clarifies that that rule doesn’t apply to “proposals that raise issues of broad social or ethical concern related to the company’s business” (SEC).

Effectively, the SEC has opened the door for ESG and impact-related proposals. But wait, don’t crack that champagne open just yet. First, remember that these proposals are non-binding, and second, the anti-ESG crowd is also taking advantage of the rule.

Here’s the second thing you need to know: There are too many public companies for an institutional investor to recommend every proxy vote to its clients. Often, these firms leverage a proxy advisory firm to advise how to vote.

These proxy advisory firms were scrutinized for their influence in the capital markets and, therefore, over companies in the recent anti-ESG crusade in the US Congress. However, they are often the subject of bipartisan scrutiny as well.

With that framing, let’s jump in.

Enter the ESG skeptic proxy advisory

One of the proxy advisory firms under scrutiny is Institutional Shareholder Services (ISS). ISS offers many types of ESG services and proxy advice options, but like many proxy advisors, it hasn’t provided anything to the anti-ESG crowd. There are two ways to look at this. First, considering non-ESG factors would seem to be just ‘business as usual’ along the lines of traditional investing. Second, ESG issues are material and in pursuit of long-term growth, and material risks are fiduciary already.

Despite these perspectives, this past March, ISS announced that it was partnering with Bowyer Research on a new offering for “ESG skeptics.” According to Reuters, the reason appears to be to quell the anti-ESG scrutiny:

A strong reception for the guidelines could dampen criticism of ISS from U.S. Republican politicians, who have said the Maryland-based firm backs too many shareholder resolutions on environmental, social or governance (ESG) topics.

This led me to wonder how ISS or Bowyer Research defines ESG. After all, if you’re going to be skeptical about something, surely you would define that thing. To reiterate my perspective on the mountain of work, I’ve written about the anti-ESG pushback: You can’t be against ESG because that would break fiduciary duty.

Still, I couldn’t find a definition of ESG on the ISS or Bowyer Research pages.

If you’ve been a subscriber for a while, you know I build on ESG’s original meaning from 2004:

ESG: The material Environmental, Social, and Governance risks that affect a company and opportunities that drive toward long-term value and sustainable growth.

That’s how I define it, but many anti-ESG pundits define it within the issues Bowyer Research lists in its Overview of Our Principles Regarding Proxy Voting and Engagement, which favors shareholder over stakeholder capitalism. Here’s the list as of April 2024 (Bowyer Research):

• Oppose attempts to pressure companies to diminish the use of fossil fuels.

• Oppose proposals which pressure financial companies to divest from fossil fuels.

• Oppose attempts to use congruency proposals to defund professional associations and advocacy groups along ideological lines.

• Oppose proposals which pressure companies to disinvest from pro-life states.

• Oppose proposals which seek to embarrass companies for seeking lower-tax jurisdictions.

• Oppose proposals which seek to focus management toward broad social goals (such as racial justice or general market or economic performance) as opposed to matters under company control.

• Oppose proposals which discourage financial services offered to businesses engaged in transactions protected by the 2nd Amendment, or impose surveillance obligation towards the same.

• Support proposals rescinding past decarbonization efforts.

• Support proposals that call into question debanking and deplatforming practices along religious or political lines, and

• Support proposals which discourage companies from speaking out on divisive non-core political issues regarding abortion, social justice, and sexual identity issues.

• Support proposals which examine the risk that DEI programs create legal risk in light of the Harvard SCOTUS ruling regarding race and gender quotas.

It is quite the list of issues without much consideration for materiality. For example, surely a healthcare company would talk about issues of abortion and sexual identity, no? Why would you support a motion to rescind a past decarbonization effort indiscriminately?

Look, not every sustainability or social justice resolution is actually ESG-related, as they are not all material either. And I’m also all for investor choice, so I won’t complain that this is an option. Still, is Bowyer Research really an ‘ESG skeptic’ or simply ‘anti-ESG?’

According to Bowyer’s website:

Our approach is deeply skeptical regarding ESG and therefore goes beyond simply not supporting it and onto actively countering it when we believe it conflicts with rigorous definitions of pecuniary return to shareholders, which we think it quite commonly does.

‘Actively countering it’ seems more anti-ESG than skeptical. Let me give you an example.

In Don’t Speak, I wrote that the proposal to have Jack in the Box report carbon is likely less material than other transitional risks that they have. While reporting emissions is becoming table stakes, materiality isn’t universal. That is being skeptical about an ESG-related proposal.

The explanation of their opposition and support reads more like conservative talking points than a specific investing approach. In some cases, you could certainly say the same about ESG-related proposals and alignment with liberal values, which I suppose is the point here, but I wouldn’t necessarily call it ESG skeptic.

I am skeptical overall

Two things make me skeptical of this whole thing. First, the ISS website does not mention Bowyer Research or ‘ESG skeptic.’ This includes no mention within the seven listed specialty proxy voting policies (Taft-Hartley, SRI, Sustainability, Public Fund, Faith-based, Climate, and Global Board Aligned). This could be because the options will only be available to government (pension) funds, but it is unclear.

It makes sense to target pensions, as the backlash has come from conservative states specifically. For example, one of Texas’s pensions recently pulled $8.5B out of BlackRock due to state legislation preventing it. On the other hand, pensions seek long-term returns, which is a crucial ESG focus and the one I used to tie together the themes in Larry Fink’s letter to investors just last week.

The second reason I’m skeptical is that Bowyer Research didn’t even have a web presence besides a logo on a website until late March 2024. Before the ISS announcement, there appeared to be a registered domain with a redirect to a Pennsylvania business page that no longer exists or simply a logo (Wayback Machine). I find it bizarre that they quickly went from a website without information to advising on proxy resolutions through one of the world’s most influential market players. Good on them for closing business, I suppose. One person’s ESG risk is another person’s opportunity.

Let’s examine what one of their recommendations looks like in practice.

Treating religious liberties as a systemic issue

In ESG Mindset, I wrote this about social justice issues in Chapter 4:

Companies cannot ignore the systemic Social issues that plague modern business and our world. There are intersections, but finding them can be difficult.

The crux of this statement reflects how companies can understand their material intersection with systemic social justice issues. Since ESG Mindset favors materiality, I recognize that not every company has the same intersections, risks, or opportunities around these issues with their stakeholders.

Having said that, there are two guidelines from Bowyer Research around social justice that we can similarly look to for their perspective:

• Oppose proposals which seek to focus management toward broad social goals (such as racial justice or general market or economic performance) as opposed to matters under company control.

• Support proposals that call into question debanking and deplatforming practices along religious or political lines.

The first guideline suggests that Bowyer Research will oppose proposals that address non-material systemic social justice issues. The second is on a particular topic that appears to be bipartisan.

And so proxy season provides us with an example for Bowyer Research’s recommendations, and they are supporting proxy resolutions to investigate the debanking of religious organizations as a material issue for banks. What’s interesting is how they frame it. Take the recent resolution filed at BNY Mellon (pages 100-101).

Shareholders request the Board of Directors of BNY Mellon conduct an evaluation and issue a report within the next year, at reasonable cost and excluding proprietary information and disclosure of anything that would constitute an admission of pending litigation, evaluating how it oversees risks related to discrimination against individuals based on their race, color, religion (including religious views), sex, national origin, or political views, and whether such discrimination may impact individuals’ exercise of their constitutionally protected civil rights.

That sounds an awful lot like a more expansive racial equity audit and Bowyer Research supports it. I’m going to put aside the deeper questions about the intention here and let you draw your own conclusions.

This resolution falls into the second bullet above, the one covering politicized debanking. However, it also REALLY seems to fall into the first bullet and contradicts itself as it puts religious views into an ‘inclusive’ class. Bowyer has supported this resolution across several banks, pointing to broad social goals across the general market. These filings appear at:

• Bank of New York Mellon Corp

• First Citizens Bancshares, Inc.

• Wells Fargo & Company

• Western Alliance Bancorporation

• Zions Bancorporation, National Association

• Truist Financial Corporation

• Regions Financial Corporation

• Morgan Stanley

• Citigroup Inc.

With this breadth of targeted firms, the resolution seems to be targeting social goals at a material intersection, so well aligned with its guidelines.

Only, this isn’t quite the case. In its Notice of Annual Meeting and Proxy Statement, BNY Mellon explains why it recommends voting against, which contradicts the latter half of Bowyer’s first bullet above, “matters under company control.”

As the “bank of banks”, a majority of BNY Mellon’s clients are institutions.

In other words, BNY Mellon won’t be deplatforming retail banking clients at scale because it doesn’t have them, nor does it appear to have checking or savings accounts. Yet Bowyer Research still supports this proposal.

Here, an anti-ESG skeptic, if I can call myself that, might argue that a more material perspective would be to assess the investment options for religious or conservative investors and related solutions and fight for that. Still, this more openly admits risks along a stakeholder need, which appears to be something Bowyer is unwilling to connect the dots on, but ironically does anyway in its support of this resolution.

De-banking is an especially harmful and risky form of corporate activism because many corporate stakeholders perceive it, not as a form of responsible corporate citizenship, but a way to punish certain political views in ways that seriously alienate large swaths of a company’s base. De-banking creates serious legal, regulatory, political, and financial risk that cannot be ignored.

I’ve long argued that every company has stakeholders and that Bud Light’s biggest misstep (which ultimately turned out to be a blip) was that they didn’t understand their conservative stakeholders well. Here, the resolution asks firms to consider conservative stakeholders, which is still stakeholder capitalism.

So, with stakeholders in mind here, surely the door would swing to protecting other types of stakeholders, no?

Perhaps unsurprising is that Bowyer does not support anti-discriminatory DEI efforts in other proxy advice. It actively counters DEI efforts but fights against religious discrimination, going so far as to say the first can augment the latter.

Bowyer supports several resolutions filed at corporates, such as the Report on Respecting Workforce Civil Liberties (an example from the resolution at Walmart Inc.). Effectively, the resolution claims that DEI efforts harm the company and divide people rather than unite them, but the alternative recommendation is too nebulous to be actionable.

Companies should instead promote diversity by respecting the inherent dignity and uniqueness of each individual and strengthening trust and unity.

I mean, this is what DEI programs are supposed to be doing, but it argues that pursuing a diverse workforce through these programs is at the cost of alienating another group.

I felt compelled to write this piece because Bowyer sits at a curious intersection for me personally. First, I directly support DEI efforts in my work with startups. I also try to be the best possible ally and am always eager to learn more. Second, I wrote much of this on Sunday morning, sitting in my pastor’s office during service, working on her computer, and finished it in the hour before I head over to the church again for the monthly Council meeting.

Are these two examples what it means to be an ESG skeptic, or is it just catering to a particular kind of investor, one that doesn’t like the overly politicized interpretation of ESG? By writing anti-ESG advice against something ESG is not, this ‘ESG skeptic’ advice reveals what it truly is: Impact skeptic, SRI skeptic, nothing more.

Either way, the answer might not matter as investors are in control, and ultimately the board can either act or not. BNY Mellon’s AGM is today (April 9th) at 9AM ET. We’ll see how much support the debanking resolution receives. But take heart, dear reader, in knowing that while anti-ESG proposals are on the rise, the support remains very low overall.