As GreenFin contributing editor Emily Chasan covered earlier this year, 2022 was the busiest proxy season ever. With the record-setting season in the rear view, what did the busy-ness deliver for ESG?
First, some context. Stewardship and engagement are the primary tools the investment industry wields as its means to guide managed assets to net zero. The “why” for engagement is that it delivers on fiduciary duty by both preserving and enhancing the value of assets that an investor is overseeing on behalf of beneficiaries.
Proxy voting is maybe the sharpest tool in an asset manager’s toolset (although some would counter that divestment is). Voting outcomes produce non-binding results, but they serve as a reliable bellwether of investor sentiment on issues that a company’s board and management may then need to address.
Save for a few exceptions, many of the world’s largest asset managers have a flat-out “no divesting” policy. So while the bite from asset managers themselves are often delivered with baby teeth, the reputational hit from the media coverage and subsequent public discussion on a company’s practices deemed unsustainable or unjust bite harder.
That said, be it climate change, biodiversity loss, ocean plastics, excessive executive compensation or racial justice, the needle on ESG issues doesn’t budge via discourse, however thoughtful it is.
So with a proxy season that saw a considerable increase in the number of ESG-themed proposals coupled with a considerable decline in support of them from major asset managers, where does this leave us on finance’s sustainability journey?
Engaging and escalating
For matters of ESG progress or regression, it’s hard not to start with BlackRock, given it has shouted loudest from the highest skyscraper about its role as a sustainability champion. That is, until the calls for climate action reached Texas, West Virginia and other states that don’t welcome such noise but do have copious assets to be managed.
When BlackRock shares that its Investment Stewardship team voted 27 percent less frequently to signal concerns about climate action compared to 2021, and that it decreased its support for company directors due to climate-related concerns by 30 percent, that’s a measurable page turn in the wrong direction for the sustainability agenda.
Long-term investors such as BlackRock, State Street and Vanguard — which together constitute the largest ownership of 88 percent of the S&P 500 — have a definite interest in sustained value creation and preservation in the companies they own, just as the companies themselves do. The wane in support for climate-focused resolutions is a misstep on the value preservation path, especially on a warming and less predictable planet.
Risk and return aside, finance is built on relationships and leverage. Working with a company to alter its business model and change practices takes time, and it takes meaningful relationship-building by investors. But again, without leverage (as in consequences) of real import, what’s the motivation to heed investor demands?
Two steps forward, one step back
Proxy voting may be a sharp tool, but it starts to look a little blunt when the engagements don’t have substantive escalation paths and asset managers’ convictions about how ESG risks should be managed fluctuate with political winds.
To be fair, and as Mindy Lubber writes, firms such as BlackRock getting positioned by officials in Idaho, Texas, Oklahoma and elsewhere as a “woke” operation is perplexing. These states’ attacks on ESG is based on a fiction that, as Lubber puts it, “climate-smart business practices are somehow a secondary, ideologically driven sideshow to the real financial concerns facing investors and companies.”
That said, founder of the self-described “anti-ESG” firm Strive Asset Management Vivek Ramaswamy’s assertion that the major asset managers are participating in doublespeak doesn’t feel too off the mark.
The wane in support for climate-focused resolutions is a misstep on the value preservation path, especially on a warming and less predictable planet.
For example, BlackRock’s 2021 Annual Report has three words on the cover page: “Investing with purpose.” BlackRock’s purpose is, in its own words, “to help more and more people experience financial well-being.” This should be controversial to nobody.
The doublespeak arises when the world’s largest asset manager enters 2021 talking sustainability ambition, then this year retreats saying that the reason it pulled back support for ESG-themed resolutions was that they were too prescriptive, and that “most investors took a measured, materiality-based approach in their analysis and voting on proposals this proxy year.”
As You Sow CEO Andrew Behar didn’t see it as such. “It’s a nice excuse. They were not overly prescriptive. I think Black Rock is just trying to pretend that they are pro-oil, so they don’t get boycotted by Texas, Oklahoma, Wyoming and West Virginia.”
To complicate things further, asset managers such as Strive are capitalizing on the current fraught moment for ESG. The firm plans to replicate the strategy of funds that advocate for sustainable business practices by introducing resolutions that will bring attention to “ESG’s contradictions.”
On the electoral politics horizon, who knows what to make of 2024? In the meantime, the 2023 proxy voting season will be telling as to the direction for sustainable finance. As we know, democracy is messy. That’s no reason not to engage, but with faith in democracy slipping in general, a lot is at stake in how asset managers engage and vote on ESG issues.
Let’s hope that the recent decline in support for ESG resolutions turns out to be the one step forward, two steps back phenomenon so common to both democracy and sustainability.
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