The way forward for ESG
Financial Times (archive.ph)
By Brooke Masters
2024-09-07 04:00:55GMT
Over the past few years, investor pressure has wrought visible changes at major US public companies. Pledges to address inequality and support diverse workforces are now common. Nearly 80 per cent of big companies disclose their carbon emissions and many actively seek to cut packaging and other waste, according to MSCI data. Some have also promised to hit net zero at some far off date.
In the US, many of these actions were prompted, or at least encouraged, by investor pressure. Big asset managers talked openly of the importance of environmental, social and governance factors and often backed up their rhetoric with votes for proxy proposals that focused on climate change and inequality.
In 2021, the world’s two largest money managers BlackRock and Vanguard each backed more than 46 per cent of environmental and social proposals, saying they were in the best interests of investors. Overall support for “E&S” questions hit a record 33 per cent, and the ESG movement was on a roll.
Four years later the picture looks different. BlackRock supported just 4 per cent of E&S proposals in the 2024 proxy season and Vanguard voted against all of them. Only 13 resolutions were passed, down from 64 in 2022.
Left-leaning activists are wringing their hands about the shift. Some complain that the biggest US investment firms were “greenwashing” and never really cared about climate change and inequality. Others contend that the money managers have turned chicken in the face of Republican-led attacks on “woke capitalism” and red state boycotts of financial firms that use ESG factors in investing.
There is a less sinister answer. The ESG movement has already scored most of the easy wins, and activists now face a much tougher task. When ESG got going, many investors did not see a conflict between doing good and doing well. Shares in clean energy companies rose rapidly. Profit-minded investors and activists all wanted companies to measure and manage their climate risk properly; bean-counters and tree-huggers could likewise cheer corporate efforts to cut plastic waste or reduce energy needs.
On the social side, improving the recruitment and retention of diverse workers not only addressed the societal problems revealed by the 2020 protests against police brutality but also cut turnover and boosted employee morale.
Now the profit motive and progressive idealism have started to diverge. Rapid decarbonisation is proving to be complicated, costly and in some places unpopular. Energy security concerns have sent the shares of fossil fuel companies shooting up, and consumer boycotts such as those of department store Target and the maker of Bud Light beer over their handling of LGBTQ+ issues have made clear that visible social stands can have financial costs.
US funds that are explicitly committed to ESG have now suffered seven straight quarters of net outflows, and total assets at $336bn, are well below their 2021 peak, according to Morningstar Direct.
That puts money managers like Vanguard and BlackRock in a bind. The vast majority of the shares they control are in index funds that do not have an ESG focus, and US law requires fund managers to act in the financial best interest of their clients. That means fund managers could face lawsuits if they stray too far from prioritising profits in service of the greater good.
But sustainability activists believe that the chance to prevent irreparable climate change is slipping away and they are in no mood to throttle back. They have continued to use proxy proposals to press for more action on social and environmental issues, including changes of business strategy and setting formal emissions targets. They have also sought to shame money managers for continuing to invest in fossil fuels.
The pressure campaign hasn’t had the desired result. Overall shareholder support for E&S proposals has halved since 2021 to 16 per cent. In addition, many of the biggest US fund managers have scaled back or cancelled their commitments to groups that pressure companies to cut carbon emissions.
Money managers are seeking a way out of the impasse. BlackRock plans to split its proxy votes. Climate-focused funds will hold companies to higher standards on carbon emissions, while the others will consider the issue as part of financial performance. BlackRock and Vanguard are also experimenting with letting index fund customers vote their own shares by picking a voting philosophy. Choices include pro-labour, oppose ESG, and Catholic values.
Split votes will complicate ESG campaigns. But the principle should catch on. Now that investor pressure is having so much impact on corporate behaviour, the actual owners, rather than their hired fund managers, should be the ones who have a say.
---
Brooke Masters is the FT's US financial editor, and an associate editor. She leads the team of reporters covering financial services in the world's financial capital and writes a business column.
In 16 years at the FT, she has held a variety of editing, reporting and commentary roles in both New York and London. Among them were opinion and analysis editor, companies editor and chief regulation correspondent. She spent the first part of her career at the Washington Post covering criminal justice, local politics and education.
Financial Times (archive.ph)
By Brooke Masters
2024-09-07 04:00:55GMT
Over the past few years, investor pressure has wrought visible changes at major US public companies. Pledges to address inequality and support diverse workforces are now common. Nearly 80 per cent of big companies disclose their carbon emissions and many actively seek to cut packaging and other waste, according to MSCI data. Some have also promised to hit net zero at some far off date.
In the US, many of these actions were prompted, or at least encouraged, by investor pressure. Big asset managers talked openly of the importance of environmental, social and governance factors and often backed up their rhetoric with votes for proxy proposals that focused on climate change and inequality.
In 2021, the world’s two largest money managers BlackRock and Vanguard each backed more than 46 per cent of environmental and social proposals, saying they were in the best interests of investors. Overall support for “E&S” questions hit a record 33 per cent, and the ESG movement was on a roll.
Four years later the picture looks different. BlackRock supported just 4 per cent of E&S proposals in the 2024 proxy season and Vanguard voted against all of them. Only 13 resolutions were passed, down from 64 in 2022.
Left-leaning activists are wringing their hands about the shift. Some complain that the biggest US investment firms were “greenwashing” and never really cared about climate change and inequality. Others contend that the money managers have turned chicken in the face of Republican-led attacks on “woke capitalism” and red state boycotts of financial firms that use ESG factors in investing.
There is a less sinister answer. The ESG movement has already scored most of the easy wins, and activists now face a much tougher task. When ESG got going, many investors did not see a conflict between doing good and doing well. Shares in clean energy companies rose rapidly. Profit-minded investors and activists all wanted companies to measure and manage their climate risk properly; bean-counters and tree-huggers could likewise cheer corporate efforts to cut plastic waste or reduce energy needs.
On the social side, improving the recruitment and retention of diverse workers not only addressed the societal problems revealed by the 2020 protests against police brutality but also cut turnover and boosted employee morale.
Now the profit motive and progressive idealism have started to diverge. Rapid decarbonisation is proving to be complicated, costly and in some places unpopular. Energy security concerns have sent the shares of fossil fuel companies shooting up, and consumer boycotts such as those of department store Target and the maker of Bud Light beer over their handling of LGBTQ+ issues have made clear that visible social stands can have financial costs.
US funds that are explicitly committed to ESG have now suffered seven straight quarters of net outflows, and total assets at $336bn, are well below their 2021 peak, according to Morningstar Direct.
That puts money managers like Vanguard and BlackRock in a bind. The vast majority of the shares they control are in index funds that do not have an ESG focus, and US law requires fund managers to act in the financial best interest of their clients. That means fund managers could face lawsuits if they stray too far from prioritising profits in service of the greater good.
But sustainability activists believe that the chance to prevent irreparable climate change is slipping away and they are in no mood to throttle back. They have continued to use proxy proposals to press for more action on social and environmental issues, including changes of business strategy and setting formal emissions targets. They have also sought to shame money managers for continuing to invest in fossil fuels.
The pressure campaign hasn’t had the desired result. Overall shareholder support for E&S proposals has halved since 2021 to 16 per cent. In addition, many of the biggest US fund managers have scaled back or cancelled their commitments to groups that pressure companies to cut carbon emissions.
Money managers are seeking a way out of the impasse. BlackRock plans to split its proxy votes. Climate-focused funds will hold companies to higher standards on carbon emissions, while the others will consider the issue as part of financial performance. BlackRock and Vanguard are also experimenting with letting index fund customers vote their own shares by picking a voting philosophy. Choices include pro-labour, oppose ESG, and Catholic values.
Split votes will complicate ESG campaigns. But the principle should catch on. Now that investor pressure is having so much impact on corporate behaviour, the actual owners, rather than their hired fund managers, should be the ones who have a say.
---
Brooke Masters is the FT's US financial editor, and an associate editor. She leads the team of reporters covering financial services in the world's financial capital and writes a business column.
In 16 years at the FT, she has held a variety of editing, reporting and commentary roles in both New York and London. Among them were opinion and analysis editor, companies editor and chief regulation correspondent. She spent the first part of her career at the Washington Post covering criminal justice, local politics and education.
