Environmental, social, and governance investing has grown from a cottage industry to a full-blown force. With trillions of dollars under ESG mandates across the world, the sector is here to stay. As such, the movement is beginning to change beyond simple exclusionary and data-based indexing. In this case, ESG proponents are taking a page out of activists’ playbooks. We are talking about influencing policy and ESG changes through proxy voting.
However, despite all the talk, it turns out that larger shareholders are not doing that – and the voting records show a different story.
And now with many index fund sponsors giving the shareholders the right to vote, ESG’s influence on corporate boards may be failing.
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ESG In the Last Proxy Season
ESG and socially responsible investing (SRI) has long been a game focusing on the “good” companies. Early indices were exclusory, kicking out firms that did not meet certain mandate requirements. Likewise, the surge in ESG ratings by firms like Morningstar and S&P Global continues this trend beyond simply not including tobacco or firearms in a portfolio.
However, the recent trend is a reversal of this scenario by buying the “bad” firms and influencing them to change for the better. Large pension funds like CalPERS and Norway’s investment fund have pushed for environmental changes, diversity and other social measures. And they are doing so with their large share counts, pushing ballot initiatives and voting during proxy season.
Not to be outdone, many of the largest asset managers have agreed to join the fight. BlackRock, State Street and, to some extent, Vanguard have pledged to vote on various ESG measures during proxy season. Thanks to the rise in indexing, these firms now hold trillions of dollars in investor money.
Despite the promises, it doesn’t look like that is exactly what is going on.
Over the summer, BlackRock published its latest report on how it voted during proxy season. During the 2021-2022 proxy year, the BlackRock investment stewardship group supported 90% of director elections and 57% of all items on agendas at shareholder meetings. When digging deeper into ESG proposals, BlackRock only supported 24%, which is down from 43% in the year before and less than the 27% of the ESG proposals supported by all shareholders. These included shareholder proposals for decommissioning fossil fuel assets, eliminating financing and insurance underwriting for fossil fuel projects as well as several diversity, equity and inclusion-related shareholder proposals.
And BlackRock is not alone.
According to a 2021 MIT Sloan Business school study, Vanguard voted no on nearly every ESG proposal that it saw. This included casting all the votes in its Vanguard FTSE Social Index Fund (VFTNX) – a nearly $14 billion ESG index fund – in favor of “no.” Overall, institutional investors supported just 33.8% of all ESG measures this proxy season, down from 44.3% last year.
A Shift In Voting
The reason for the over-promising and under-delivering voting patterns?
Part of it could be the shift in political attitudes and the recent bans by several states. States like Texas, Florida and Georgia have pulled billions from BlackRock and other ESG-friendly asset managers in recent months. Moreover, many of them have called for bans of certain asset managers for their state and public university pension plans. This could be putting serious pressure on asset managers to not take a deep plunge on ESG and play the middle ground. Proposals that may seem too “extreme” are voted down.
In addition to this culling of ESG-friendly funds by certain states, many political and market pundits have been calling for more shareholder say in how these large index funds vote. Right now, shareholders holding a S&P 500 index fund have no say on what Coca-Cola does. You’re voting for the fund’s management/board, who in turn vote on Coca-Cola’s proposals.
But with index funds now holding trillions of dollars, shareholders are clamoring for more say. To that end, several asset managers, spearheaded by Charles Schwab, have announced new programs designed to let investors in index funds vote directly on company proposals/directors in the funds.
At the same time, the SEC is now demanding more reporting by the major asset managers, particularly with index funds, on just how they vote on proposals and their methodology for making such votes.
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ESG Proxy Influence May Fade Away
Given the changes to the political and regulatory environment, influence as an ESG tool may be waning. Now, it is true that many private endowments and certain large state pension plans have doubled-down on their efforts to influence. For example, New York’s major pensions have called out BlackRock for not living up to its promises. But the trend seems to be decelerating.
Already, most of the larger investment firms are now not voting in favor of ESG proposals, and with the political changes, this should continue to be the case.
Investors looking at ESG for their portfolios may find that exclusionary indexing and buying the “good” firms to be the real game in town. Here, there is plenty of evidence that over the long run firms with good ESG practices tend to exhibit great risk-adjusted returns and lower overall volatility. Ultimately, the cream of the crop will rise and investors won’t have to worry about changing the “bad.”
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