Republican Senators Escalate Warnings to ESG Actors

Senator Pat Toomey, R-Pennsylvania, wrote a follow-up letter to twelve ESG ratings and analytics providers on October 31 requesting that they keep documents related to the methodologies for their environmental, social and governance ratings.

Toomey is the ranking member on the Senate Banking, Housing and Urban Affairs Committee, and will retire before the next Congress is sworn in, and will likely be replaced by Senator-elect John Fetterman, D-Pennsylvania, this January.

This letter follows an earlier letter sent September 20 to the same twelve firms asking for clarification on their ratings methodology.

He requested all non-proprietary methods for assigning ESG ratings. More specifically, he asked for how they engage with the companies they rate, if they employ analysts with sector specific expertise, if they have a revision process for errant ratings, if companies can dispute ratings, how they handle companies that do not provide requested information, how they evaluate data quality, if they consider political donations as a factor, and whether or not they use state-owned media as a data source in creating ESG ratings.

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The letter also asked if involvement in fire arms, fossil fuels, or tobacco influences an ESG rating, and if so, how. These three industries, especially fossil fuels, are the most cited by Republicans when expressing skepticism or hostility to ESG strategy.

Six of the twelve provided responses. The other six either have not responded or provided responses that the Toomey considered “incomplete”. Institutional Shareholder Services, the parent company of ISS Media was one of the six that did not respond. The other five non-responsive ESG raters were Arabesque S-Ray, Carbon Disclosure Project, FactSet, RepRisk, and Sustainalytics

Senator Cotton, R-Arkansas, sent a more threatening letter to 51 law firms who counsel investors and other actors in the ESG sector.

Cotton’s letter was co-signed by four other Republican senators including Marsha Blackburn of Tennessee, Chuck Grassley of Iowa, Mike Lee of Utah, and Marco Rubio of Florida. Several of the law firms were contacted for comment and either declined to comment or did not respond to the request.

Cotton’s letter indicated that firms applying ESG investment principles The letter does not specify a specific industry such as investment advice or ESG ratings but suggests that the “ESG movement” is colluding “to restrict the supply of coal, oil, and gas, which is driving up energy costs across the globe and empowering America’s adversaries abroad.”

This alleged collusion could violate anti-trust laws according to the senators’ letter, and it says that there is no ESG exemption to federal anti-trust law. The letter advises the firms to store documents related to their communications with clients about ESG in anticipation of anti-trust investigations.

These letters follow similar warnings sent to Blackrock in August by 19 Republican attorney generals which alleged that Blackrock was privileging its “climate agenda” over its fiduciary duties. Another group of Republican attorney general last month sent civil investigative demands to the six largest banks in the U.S. to explore the AGs’ assertions that the banks’ ESG pledges have harmed the energy sector.

The Louisiana state pension fund also divested from Blackrock last month for their “blatantly anti-fossil fuel policies.” Other states, including Utah and Missouri, have divested from BlackRock with similar reasoning.

Tags: BlackRock, ESG, fire arms, Fossil Fuels, ratings, Tobacco

The share of clients investing with diverse-owned firms grew from 20% to 39% over the past three years, though AUM of by diverse-owned firms remained lower than non-diverse peers.

The greatest challenge to research on diverse ownership and management in the financial services sector is a lack of data and formalized congruent reporting standards, according to Wilshire Associates’ 2022 Diversity, Equity and Inclusion report.

The lack of data led Wilshire to focus “on analyzing our database of diverse-owned managers and understanding the profile of this population and holdings within our own client base.”

In 2018, Wilshire announced an enhanced initiative to increase awareness among clients and consultants of asset management firms owned by people from underrepresented groups and to create proactive outreach from Wilshire to these managers.

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In response, Wilshire adopted the reporting standards of the Diverse Asset Managers Initiative, an organization dedicated to increasing the use of asset managers from underrepresented groups by institutional investors and to growing those managers’ assets under management.

According to Wilshire’s report, from 2018 to 2021, the proportion of Wilshire clients investing with diverse-owned firms grew from 20% to 39%. Despite this overall net gain, total assets controlled by diverse-owned firms remained low in comparison to their non-diverse owned counterparts.

Industry-wide, firms with women or diverse ownership at a substantial (25-49%) or majority level represented just 8.6% of all firms. While, across all manager searches, the total number awarded to diverse-owned firms doubled from approximately 10% in 2018 to 21% in 2021.

Wilshire reports, “diverse-owned firms represent 10.1% of our manager database and manage 2.0% of our clients’ assets. While our numbers are higher than industry averages, they remain at low levels and reveal that these managers are under-owned relative to their prevalence.”

Wilshire aims to increase inclusion of diverse owned firms, though the report cites various factors that have limited participation. When clients search for asset managers, those searches may be restricted to managers available on a recordkeeper’s platform, potentially leaving diverse-owned firms from properly being identified. It is also possible that some clients set a minimum amount of assets already under management.

The report cites volatility in public markets and valuation as challenges for diverse-owned managers hoping to increase assets under management, due to a low volume of diverse-owned managers in real assets and nontraditional fixed income. However, the report states, “Since 2018, Wilshire’s diverse-owned manager initiative has focused on tracking managers of public markets securities as the data is more readily available in this cohort.”

Looking forward, Wilshire reiterated its ongoing commitment and increasing scope to raise the profile of diverse-owned managers among clients and consultants and to engage proactively with the diverse-owned manager community.