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ISS on shaky ground with ESG; Why do Investors and CEOs Beg for Their Approval?  

Institutional Shareholder Services, more commonly known as ISS, is the kingmaker of corporate America.

Titans of industry, from billionaire hedge fund managers to Fortune 500 CEOs, eagerly await – and attempt to influence – ISS reports and recommendations because they are seen as pivotal in affecting the votes of large investment firms on matters of M&A, board slates, and other shareholder-level decisions.

In recent years, ISS has claimed itself to be the market leader in the environmental, social, and governance (ESG) field, demanding that companies focus on reducing their environmental footprint and increasing diversity or risk incurring their wrath.

In the summer of 2020, publicly traded companies received a letter from ISS’s head of ESG, Marija Kramer, asking them to report the race and ethnicity of each of their directors.

A section from the letter reads:

 We are seeking information on the self-identified race/ethnicity of each of the company’s directors and named executive officers (NEOs), to the extent that the company and the individual directors or NEOs are willing to provide this. This can be done using the attached Excel file which allows you to choose from multiple categories that are largely drawn from the OMB Standards for the Classification of Race and Ethnicity.

The author, who is white, represents the broader ISS leadership team that is less diverse than the image they claim to espouse. The more you research ISS’s record, it seems clear that the organization does not appear to have any legitimacy to comment on environmental impact or racial diversity given its own record. Also, its profit motives are suspect.

The Pot Calling the Kettle White?

ISS seems to be an odd candidate to assess performance on diversity, equity, and inclusion. All 17 of the listed ISS executives appear to be white. Similarly, all the executives at ISS’s parent companies – Genstar Capital and Deutsche Boerse – also appear to be white. Of the nearly 30 executives and board members between ISS and its parent companies, 100% are white. How can a company that does not have a single person of color holding an executive position play a role in scolding companies for lack of diversity?

 Pay to Play Greenwashing?

ISS appears to have an opaque pricing model, leaving investors uncertain as to whose interests are actually being represented – the company paying ISS for so-called ESG certifications or the investors who rely on ISS for objective analysis?

One illustration of this is Bridgestone Tire, which ISS honored in 2021 with its highest ESG prime certification. In 2021, Bridgestone paid a $3.35 million civil settlement after it was charged with violating the Clean Air Act.

That same year, Bridgestone was part of a $5.5 million settlement that claimed one of Bridgestone’s factories in Louisiana had dumped toxic wastewater into the bayou. As an aside, Bridgestone Americas appears to have only one person of color on its management team.

This example calls into question the process by which ISS bestows its ESG prime certifications and other ESG ratings on all companies. If companies pay to be considered for ISS’s various certifications, doesn’t it give them a skewed incentive structure to give said companies improved ESG marks?

 There is a Better Way

If the leading promoter of ESG cannot itself live up to its own standards, then we need to rethink ESG itself and opt for corporate citizenship instead. That is the reason for the creation of The Corporate Citizenship Project (www.CorporateCitizenshipProject.com), a think-tank focused on offering objective reports and analysis on governance issues in corporate America.

Corporate Citizenship means companies play a role in making their communities and our country a better place, not through arbitrary and selectively enforced rules foisted on them by unelected outsiders, but instead through their own initiative and based on their own needs and resources.

The recent Russian invasion of Ukraine is a further illustration of the flaws of the ESG movement, which has pushed for divestment from domestic energy producers for years. As a result of this approach, the United States is vulnerable to massive supply shocks resulting from oil shortages. Recent reports from The New York Times say American diplomats are meeting with autocratic regimes in Venezuela and Iran to try to shore up supplies of oil to make up for the oil embargo on Russia.

If ESG advocates at ISS had not pushed for divestment from domestic oil production, maybe the United States would not have to make dubious deals with unscrupulous global tyrants just to keep gasoline prices at a reasonable rate.

Unfortunately, practical concerns are not of interest to ESG proponents at ISS. ESG is an arbitrary and virtue-signaling movement put together by out-of-touch white billionaires like Larry Fink. They are insulated from the need for any practical considerations and who practically never follow their own pious rules.

Corporate America does not need to bend to the will of the ISS. It is time for an alternative.

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