No to ESG?

By: Kevin Thomas, Director of Shareholder Engagement

Recently I sat down with university administrators from across the country who were discussing the fossil fuel divestment campaigns they have encountered on their campuses and what those campaigns have meant for their investment practices.

The good news is that many Canadian universities – in particular their endowments and pension funds – are deeply committed to the goal of addressing climate change, as well as other material environmental, social and governance (ESG) issues that affect their portfolios. There is a healthy debate about how to best do that, but it starts from the understanding that there is important work to do. These people want to be part of the solution.

I was surprised, however, by the report from one university administrator that, during an on-campus meeting of the university’s governors about divestment demands, students outside began chanting “No to E.S.G.!”

Odd. You’d think there would be strong support for funds addressing ESG issues in their investment portfolios. But the students were concerned that “ESG screening” or “integration” or even “engagement” would be nothing more than an ineffective and weak alternative to the decisive act of divesting.

And they could have a point.

Shareholder engagement done well is an effective tool to drive real change in corporate behaviour. But there is a danger that, without proper research and clear goals, it can become little more than a cozy chat with management by portfolio managers for whom engagement on ESG issues is foreign territory. Lobbing boilerplate questions on governance or sustainability issues after the “real” (read: financial) business of the meeting is over does not meet the test. How are asset owners to know whether their asset manager or other service provider is raising real issues and pursuing them vigorously, backed up by further action if the company is reluctant to act?

When the Financial Sector Commission of Ontario reviewed reports from Ontario pension funds on whether, and if so how, they took ESG matters into account in their investment decision making, too many plans said they just leave it to their asset managers. That could be a problem.

Shareholder activists have called out Blackrock’s proxy voting record, for example, noting that while the world’s largest asset manager claims to engage with hundreds of companies on governance behind the scenes, it votes overwhelmingly in favour of management when it comes to CEO pay packages – 96.2% of the time, in fact. It also voted against every climate change-related shareholder resolution filed in 2016 that wasn’t supported by management. Shareholder votes can help back up engagement with a forceful message, but in Blackrock’s case the New York Times called its “big stick” more of a “wet noodle.”

If that’s all engagement had to offer, I might join in the “No to ESG” chant myself.

Shareholder engagement shouldn’t be an afterthought, and it shouldn’t be a weak alternative to divestment. At SHARE we talk about the four C’s of shareholder engagement. It should be: 

By taking the four C’s seriously, we demonstrate that shareholder engagement is a strong and useful response to the real environmental, social and governance challenges that we face.

If we don’t take them seriously, we may deserve the derision of those students, and the awkward “No to ESG” chant could catch on.

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