Ethical shareholder advice groups are to be reviewed by the industry watchdog amid concerns some are pushing a narrow agenda that could harm the City and the national interest.
The power wielded by environmental, social and governance (ESG) agencies is being scrutinised by the Financial Reporting Council, which is examining how they influence decisions at some of Britain’s biggest companies.
It comes as concerns grow in the Square Mile that a group of proxy and environmental advisers are promoting a left-wing ideology that prevents institutional investors from backing industries such as defense.
The advisers make recommendations to big investors about how they should vote at companies’ annual meetings on issues such as board membership and pay.
Proxy advisers are such taking a climate hard line on issues change and gender diversity.
In many cases, they have recommended that directors, including chairmen, be ousted for a lack of female representation on company boards.
The regulator will seek to determine the effect that advisers’ recommendations have, as well as whether they merely engage in “box ticking” behavior without properly examining companies on a case-by-case basis.
Some rating agencies also require investors to avoid defense stocks if they want to carry an ESG label, which has become highly sought after in recent years.
ESG rules govern billions of pounds worth of British pension investments and savings, and lump defense shares in with cigarette pedlars, animal testing companies and oil firms.
One chief executive of a City investment bank said: “One of the largest travesties that’s ongoing at the moment is the rise of these shareholder proxy firms. I think there’s a massive blow-up coming. There’s a lot of very, very curious recommendations being made.
“It is simply not possible to outsource to these computerised firms. You need to be making recommendations on a case-by-case basis. I think it’s potentially very damaging for the City.”
In the specifications of the review, the regulator said that some companies have complained they are finding it difficult to use the UK corporate governance code’s “flexibility” due to the inflexible recommendations of ESG and proxy advisers.
It added: “It is claimed the difficulty arises because proxy advisors believe such situations automatically reflect poor governance, and do not consider explanations of non-compliance appropriately. This effectively leads to negative voting recommendations.
“It is also claimed that, in some cases, companies have been unable to engage with a proxy advisor to discuss the issue and demonstrate how their approach represents good governance for their specific circumstances.”
The review is expected to start in August and will finish in March of next year.
The Financial Reporting Council was contacted for comment.