May 26 could be uncomfortable for TotalEnergies. The general meeting of the French oil and gas group takes place on this day. The activist shareholder group “Follow This” from the Netherlands then wants to apply for the company to commit to stricter emissions targets. To this end, the Dutch have teamed up with other investors.
The alliance of convenience has only a tiny fraction of the votes. But it has a powerful ally: proxy advisor Institutional Shareholder Services (ISS). This advises other investors to agree to the application of “Follow This”.
ISS and competitor Glass Lewis are the secret power at general meetings around the world. Here’s how their business works: fund providers, hedge funds, and other institutional investors hold shares in many companies. Because they buy those shares with their customers’ money, they vote for them at stockholders’ meetings — hundreds, sometimes thousands, of stockholders’ meetings each year. ISS and Glass Lewis provide such investors with recommendations on how to vote at the meetings, in return for payment.
Deutsche Börse gets involved
The two US-based companies effectively divide the voting rights advisory market between themselves. Both have made significant purchases in Europe in recent years. They now have a global market share of more than 90 percent. ISS is by far the number one and has been majority-owned by Deutsche Börse since the end of 2020. Market runner-up Glass Lewis was owned by a Canadian pension fund until two years ago, when it was acquired by private equity firm Peloton Capital Management and Canadian investor Stephen Smith.
According to the companies, the owners have no influence on the content of the voting rights advice. Politicians have no say in this either. Both ISS and Glass Lewis have strict rules on independence and transparency. Anything else would be bad for business. Nevertheless, the political pressure on companies is increasing – especially in the USA, where investments are becoming increasingly politicized.
For a number of years, ISS and Glass Lewis have increasingly recommended that their customers approve sustainability-related requests. There are now many such motions: activists have discovered that as shareholders they can sometimes exert more influence than with protest actions. Not everyone likes the fact that proxy advisors sometimes accommodate the activists.
In Republican-governed US states, there are veritable defensive battles against sustainable investment. ISS and Glass Lewis are also feeling the effects. At the beginning of the year, lawmakers in some conservative-run states banned state pension funds from following sustainability recommendations from proxy advisors.
Competition from the anti-woke prince
At the beginning of the year, the investment firm Strive Asset Management founded its own division for voting rights advice in order to compete with the market leaders from the conservative side. Strive was founded last year by investor Vivek Ramaswamy. He follows an explicit anti-sustainability course and recently made a name for himself because he wants to run as the Republican presidential candidate. In addition, he now wants to stir up the market for voting rights advice.
Warnings about the market power of ISS and Glass Lewis are not new. There is always harsh criticism of the voting rights advisors from companies, especially when they recommend not exonerating the management board of a group at a general meeting. During his presidency, Donald Trump introduced pro-business rules intended to limit the power of proxy advisors. Under his successor Joe Biden, the US market regulator SEC rolled back these rules last year.
It is actually amazing that the sustainability recommendations from the ISS and Glass Lewis are making such waves. Because fund companies and other large investors do not always follow these recommendations. Every year, the British non-governmental organization Share Action looks at the extent to which large investment companies follow the recommendations of voting rights advisors on sustainability criteria. The result of the latest “Voting Matters” study: In 2022, the world’s four largest asset managers approved even fewer applications on sustainability issues than in the previous year – and in 2021 they had already shown reluctance in this regard.
TotalEnergies’ annual general meeting on May 26 could give an indication of how powerful ISS really is today. Last year, the energy company blocked a resolution by the activist shareholders of “Follow This”; there was not even a vote. Also in the current year, Total advises its shareholders to vote against stricter climate protection targets for the company. Whether ISS’s advice to the contrary carries enough weight to make the outcome different this time remains to be seen.
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