Examination of city’s ‘ethical’ advisers accused of promoting a left-wing worldview

Ethical shareholder advisory groups are to be scrutinized by the industry watchdog amid concerns some are pushing a narrow agenda that could harm the city and national interest.

The power wielded by environmental, social and governance (ESG) agencies is scrutinized by the Financial Reporting Council, which looks at how they influence the decisions of some of Britain’s biggest companies.

As concerns grow in the Square Mile, a group of proxy and environmental advisers are promoting a left-wing ideology that prevents institutional investors from supporting industries such as defence.

Advisors make recommendations to large investors on how they should vote at company annual meetings on issues such as board composition and compensation.

Proxy advisors are increasingly taking a hard line on issues such as climate change and gender diversity.

In many cases, they have recommended that directors, including chairmen, be ousted due to a lack of female representation on corporate boards.

The regulator will seek to determine the effect of advisers’ recommendations, as well as whether they are merely engaging in “box-ticking” behavior without properly reviewing companies on a case-by-case basis.

Some rating agencies also require investors to avoid defense stocks if they wish to carry an ESG label, which has become highly sought after in recent years.

ESG rules govern billions of pounds of UK investment and pension savings, and bundle advocacy actions with cigarette peddlers, animal testing companies and oil companies.

A managing director of an investment bank in the city said: “One of the biggest travesties going on right now is the rise of these shareholder proxy companies. I think there is a massive explosion coming. There are a lot of very, very curious recommendations being made.

“It’s just not possible to outsource to these IT companies. You must make recommendations on a case-by-case basis. I think it’s potentially very damaging to the City.

In the review’s specifications, the regulator said some companies have complained about difficulty using the “flexibility” of the UK corporate governance code due to inflexible recommendations from ESG and proxy advisers.

He added: “It is claimed that the difficulty arises because proxy advisors believe that such situations automatically reflect poor governance and do not appropriately consider explanations for non-compliance. This inevitably leads to negative voting recommendations.

“It is also claimed that in some cases companies have not been able to engage with a proxy advisor to discuss the issue and demonstrate how their approach represents good governance for their specific situation.”

The review is expected to start in August and end in March next year.

The Financial Reporting Council has been contacted for comment.

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