Montana Attorney General Austin Knudsen is spearheading a coalition of 24 attorneys general in a high-profile inquiry into whether major asset managers are neglecting their fiduciary responsibilities to their clients. The coalition sent a letter on Thursday to 25 top asset managers, raising concerns about their support for environmental shareholder proposals recommended by Institutional Shareholder Services (ISS), which were flagged by the environmental activist group Ceres.
The attorneys general are questioning whether these asset managers are failing to meet their fiduciary duties by outsourcing their voting decisions to ISS or other third parties, without conducting independent financial analyses of the proposals. The letter suggests that asset managers appear to be prioritizing social credit over their clients’ financial interests.
“The asset managers seem more focused on earning social credit than on maximizing returns for their clients,” Attorney General Knudsen said. “If they are deferring their decision-making to environmental activist groups, they are not fulfilling their fiduciary duties. With the market’s general disapproval of these proposals, this situation warrants serious scrutiny.”
Evidence suggests that asset managers are heavily influenced by ISS’s recommendations, with their support for environmental proposals significantly exceeding the overall market’s support. The 25 asset managers voted in line with ISS recommendations at least 75 percent of the time, compared to the market’s average support of just 37 percent for these proposals. Moreover, only 17 percent of the proposals received majority support overall.
Additionally, several proposals supported by the asset managers, such as those setting greenhouse gas (GHG) targets for lenders and energy producers, and limiting free speech to align with the Paris Agreement, were opposed by the companies themselves on the grounds that they could harm shareholder value. Despite this, the asset managers backed these proposals.
There are also concerns about potential conflicts of interest, given ISS’s or its parent company’s affiliations with activist organizations focused on environmental goals rather than financial returns. For instance, ISS’s parent, Deutsche Börse Group, is a member of the Net Zero Financial Service Providers Alliance, which commits to aligning services with global carbon reduction goals.
The coalition’s letter also highlights a lack of financial analysis in ISS’s recommendation process. The process for developing ISS benchmarks does not require an economic assessment of how proposals affect shareholder value, raising questions about the validity of their endorsements.
“There are substantial reasons to believe that ISS is recommending proposals based on presumptions rather than financial analysis,” the attorneys general wrote. “Their process resembles federal rulemaking driven by third-party comments but lacks a crucial component: a requirement for financial analysis.”
The investigation aims to ensure that asset managers adhere to their fiduciary duties and prioritize their clients’ financial well-being.
