OPINION:
In his first novel, “Crome Yellow,” Aldous Huxley warned: “[t]o be able to destroy in good conscience, to be able to behave badly and call your bad behavior ’righteous indignation’ — this is the height of psychological luxury, the most delicious of moral treats.” ESG (environmental, social and corporate governance) has reached such a height of psychological luxury that it’s frankly becoming illegal.
For example, in May, under the banner of promoting ESG, nearly 50% of Travelers Insurance shareholders asked the company to break the law. Full stop. Specifically, about 47% of its investors backed a shareholder proposal that would have caused the company to collect and consider race when writing insurance policies, in direct violation of state law.
How did we get to a point where nearly half of an insurance company’s investors want the company to break the law? It’s complicated but critically important to understand just how the ESG movement operates.
Under corporate law, shareholders in public companies are allowed to submit proposals at the company’s annual meeting, which then get voted up or down by shareholders. Historically, these proposals were uninteresting: Should we have term limits for directors? Should we stagger the board?
In the past few years, this process has been co-opted by ESG activists trying to force companies to align their business activities with their activist agendas. Activists have told Exxon Mobil to stop drilling for oil; they’ve told Walmart to support abortion; they’ve told Twitter to do more to censor so-called hate speech. But until recently, ESG activists have not typically asked companies to break the law.
That’s now changed. Last November, the ESG activist and “socially responsible” investment firm Trillium asked Travelers Insurance to include a proposal on its shareholder proxy ballot asking the company to conduct a “racial justice audit.” Trillium explained that it wanted to “combat systemic racism” and accused insurance companies like Travelers of “charg[ing] higher premiums … in minority communities.” It, therefore, sought a “racial justice audit covering … insurance products.” The resulting report would be published on Travelers’ website and include “recommendations for improving the racial impacts of its policies.”
But here’s the problem: Travelers Insurance is not legally allowed to even collect information related to race, much less use that information to determine how much to charge customers for insurance. Maryland law provides the clearest example: “an insurer … may not make an inquiry about race, creed, color, or national origin in an insurance form, questionnaire, or other manner of requesting general information that relates to an insurance application.” Other state laws are similar.
Incredibly, Trillium did not dispute that Travelers was not allowed to ask customers about their race. Instead, Trillium claimed that its proposal wasn’t really asking about racial justice in “insurance products,” but rather in Travelers’ internal hiring policies. It wasn’t. Trillium also countered that Travelers could still hire a racial equity auditor — at rates reportedly topping $2,295 an hour — who could then issue a report on how they are unable to do a report. Travelers could then “share [the non-report] with its regulators,” explain that Travelers wants to violate the statute for a noble cause, and ask for a “safe harbor” exception so that it can collect and act on race data to “address racial justice.”
In other words, Trillium admitted that what it was actually asking Travelers to do was illegal, but wanted shareholders to vote for it anyway.
The Securities and Exchange Commission is supposed to stand in the way of such nonsense. If a company believes that a shareholder proposal is improper, it can petition the SEC to exclude it. One ground for doing so is SEC Rule 14a-8(i)(2). That section allows a company to remove a proposal if it would “cause the company to violate any state, federal, or foreign law to which it is subject.”
Travelers made just such a petition. In a 50-page filing, Travelers’ legal team and outside counsel both explained persuasively that the proposal would cause the company to violate state laws all over the country. But in a one-line statement, the SEC disagreed: “[We are] unable to conclude that the Proposal, if implemented, would cause the company to violate state law.”
Congress should immediately bring every SEC staffer involved in this decision to Capitol Hill and demand an explanation. Federal bureaucrats don’t have carte blanche to let activists run corporate decision-making contrary to state law. But even that may not solve the problem, because the SEC isn’t the only bad actor in this story.
After the SEC ruled that Travelers must include the racial justice proposal on its ballot, more than 47% of Travelers shareholders voted for it. How is this possible?
The blame lays squarely on the shoulders of two actors: the proxy advisory firms telling large asset managers how to vote on social justice issues, and the large asset managers heeding their call.
The proxy advisory market is an unchecked duopoly that holds outsized power over the corporate ballot. Two firms, Institutional Shareholder Services and Glass Lewis, control more than 95% of the proxy advisory market. And both advised their clients to back the resolution. Now ISS and Glass Lewis are not fiduciaries — meaning they don’t owe duty of care or loyalty to clients. That means they are free to put their social justice agenda above seeking financial returns for investors. But the same can’t be said for the asset managers that voted along with the advisers’ recommendations in manners that might charitably be called careless and more accurately be described as reckless.
And which firms voted their clients’ money so blithely? Some State Street and BlackRock funds, UBS, BNY Mellon, Nuveen, Wellington, Credit Suisse, HSBC and Allianz — to name a few. In justifying its vote, Wellington mustered just four words, “current practice is insufficient.” That’s reason enough to break the law? And while the vote at this year’s Travelers annual meeting was certainly lawless, it is just a narrow example of the ESG movement’s potential illegality.
Last month, 19 state attorneys general wrote a letter to BlackRock indicating that the world’s largest asset manager’s ESG activities are potentially illegal. The letter accuses BlackRock of, among other things, breaching its fiduciary duties by using client money to promote a political agenda rather than maximize returns, engaging in antitrust violations by colluding with other asset managers to impose their leftist views on corporate America, and boycotting the energy industry in violation of state law. Since then, Indiana’s attorney general, Todd Rokita, has issued a statement of his own, cautioning that “woke Big Businesses are collaborating with their leftist allies to subvert the will of the people” and that “this collusion is not only unconscionable and unethical, but it’s also illegal.”
At Strive, where I am the head of corporate governance, we are bringing a different voice and vote to corporate America. We would have voted against the Travelers proposal and done so loudly. As an asset management firm, we will never ask the companies in which we invest to break the law. We will not force any arbitrary environmental mandate such as the ones promoted by BlackRock. And as a fiduciary, we will never put social or political goals above achieving the best financial returns for our clients. ESG-linked Wall Street firms may control trillions of dollars of global capital, but there are signs they may be tumbling from the height of psychological luxury.
• Justin Danhof is head of corporate governance at Strive Asset Management.
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