Takeaways

• The dominance of proxy advisory firms has led to politically motivated ESG proposals that often conflict with shareholder value.
• Despite private firms stepping back from ESG investing, meaningful reform requires congressional action, not just SEC oversight.
• Proposed legislation aims to give the SEC explicit authority to regulate proxy advisors and restore accountability to the system.

In recent months, it has become increasingly clear that lasting reform of the proxy advisory system will require congressional action, not just regulatory fixes. The decisions made by proxy advisory firms directly influence how investors, retirement funds, and major asset managers vote on corporate matters, decisions that ultimately impact the financial security of more than 100 million Americans.

For years, the proxy advisory market has been dominated by two firms, Glass Lewis and Institutional Shareholder Services (ISS), which together control roughly 97% of the industry. This duopoly has long been criticized for advancing environmental, social, and governance (ESG) objectives that may not align with the goal of maximizing shareholder value. Their recommendations often endorse climate mandates, fossil fuel divestments, and diversity quotas, raising concerns that these firms prioritize political agendas over financial prudence.

Read More: ESG Investing Under Fire: Politics, Performance, and Greenwashing

The SEC’s Shifting Role

Attempts to rein in proxy advisor influence have faced legal and political roadblocks. During the Trump administration, the Securities and Exchange Commission (SEC) introduced rules in 2020 requiring proxy advisors to notify companies of their recommendations and allow them to respond before shareholder votes. However, these reforms were swiftly reversed under Biden-era SEC Chair Gary Gensler and later struck down by the D.C. Circuit Court, which ruled that proxy advice did not constitute shareholder solicitation under the Securities Exchange Act of 1934.

Adding to the confusion, the SEC had earlier amended Rule 14a-8 to compel companies to consider resolutions of “wider societal interest,” effectively turning proxy advisors into de facto regulators of public companies. The rule was repealed in February 2025, illustrating the instability of relying on regulatory agencies whose policies change with political tides.

Private Sector Pushback

Meanwhile, the private sector has started distancing itself from ESG-heavy agendas. The “Big Three” asset managers, BlackRock, State Street, and Vanguard, have scaled back their enthusiasm for ESG investing. BlackRock recently added Egan-Jones as a third proxy advisory option, introducing new voting policies that prioritize financial performance over social goals. This move directly challenges the dominance of Glass Lewis and ISS and signals a shift toward depoliticizing investment decisions.

The Need for Congressional Reform

Despite these private initiatives, experts agree that Congress must act to ensure lasting reform. Several members of the House Financial Services Committee, including Rep. Bryan Steil (R-Wis.), have introduced draft legislation to amend the Securities Exchange Act and give the SEC explicit authority to regulate proxy advisory firms. Without such statutory clarity, the system remains vulnerable to political swings, regulatory uncertainty, and costly litigation that undermines investors’ fiduciary responsibilities.

Also Read: ESG Thematic Funds: A Comprehensive Guide for Sustainable Investing

Ultimately, the proxy voting system needs transparency, accountability, and consistency, principles only Congress can enshrine in law. As more firms retreat from ESG-driven mandates, the case for legislative action grows stronger to protect investors and restore balance in corporate governance.

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Source: THE HILL