Stewardship in a Polarised Environment
Fabrizio Ferraro, Professor of the Strategic Management Department at IESE Business School, considers sustainability-focused engagement in the face of the anti-ESG movement.
Imagine attending the PRI in Person conference in 2014 and asking ESG professionals to assess the likelihood of this scenario: within ten years, ESG investing becomes so politically charged that two candidates for the Republican presidential nomination run on an anti-ESG platform, and several US states blacklist Wall Street asset managers for their involvement in ESG.
Few would have seen this scenario as remotely plausible – not because they didn’t foresee anti-ESG sentiments emerging among conservatives, but because they couldn’t have imagined ESG investing becoming so prominent as to warrant such intense scrutiny. Yet today, at least in the US, ESG is as politicised as diversity, equity and inclusion (DEI) and, for conservatives, is tied to what they perceive as left-leaning “woke” practices.
The political weaponisation of ESG has extended beyond rhetoric. The blacklisting by Republican-controlled states not only affected asset managers’ ability to retain these states as clients, but also had ripple effects on local investment advisors. A tangible sign of this shift is the reversal in fund flows. After years of staggering growth, ESG funds began hemorrhaging capital, starting in 2022. Predictably, the largest US asset managers have responded by either abandoning their already cautious ESG initiatives (e.g., Vanguard) or adopting a quieter approach, continuing ESG activities but avoiding public visibility (e.g., BlackRock).
European ESG professionals have not yet experienced the same degree of politicisation. However, recent far-right attempts to weaponise agrarian protests ahead of the European elections suggest that these political tactics may not be confined to the US – and Europe may not be immune to similar pressures.
Most commentators have lamented this political weaponisation, emphasising the need to rebuild a robust sustainability agenda grounded in clear materiality analysis. However, I doubt the ideological genie can be easily put back in the bottle. ESG professionals (perhaps under a new label, such as “sustainable investing”) may have to operate within a polarised political environment for the foreseeable future.
What does this mean for ESG investing?
Consider the case of shareholder engagement and stewardship. Engagement, a core component of any ESG strategy (alongside ESG integration), includes developing robust voting policies and maintaining direct dialogue with corporations in asset owners’ and managers’ portfolios. Over the past decade, academic research has provided convincing evidence of the positive impact engagement can have on improving companies’ environmental and social practices and reducing corporate and portfolio risk.
These results, however, were achieved during a period of growing consensus on the materiality of issues like diversity and climate change. This consensus facilitated the formation of coalitions among like-minded investors, such as Climate Action 100+ (CA100+), fostering a sense of unity in shareholder action.
That’s no longer the case. In a recent report on Robeco’s voting activity, Michiel van Esch, Head of Voting, observed, “The days when all annual general meetings (AGMs) passed quietly with approval rates in the high nineties are behind us. Debates during AGM season have increasingly reflected broader economic and societal issues”.
Shareholders no longer speak with one voice. The anti-ESG movement has sparked several actions from conservative activist shareholders, which, though often not material, have garnered attention and signalled divergent views on ESG issues among shareholders.
The shifting political environment, coupled with windfall profits from the energy price spike triggered by the Russian invasion of Ukraine, has emboldened companies like ExxonMobil to adopt more hostile stances against climate-focused shareholders.
In January 2024, Exxon sued two shareholders, Arjuna Capital and Follow This, to block their proposal urging the company to accelerate its emission reduction plans. While such proposals are non-binding and companies often seek dismissal by the US Securities and Exchange Commission (SEC) for those they deem frivolous, Exxon’s move was intended to intimidate – and it succeeded. Arjuna withdrew the proposal, and the case was dismissed.
How will stewardship and engagement function in a more fragmented and polarised world?
One could argue that as stakeholder positions become more diverse and polarised, the engagement teams of asset managers will play an increasingly critical mediating role.
Shareholder engagement has historically mediated between the more extreme positions of NGOs and those of the target company. Shareholders help companies anticipate emerging issues that may not yet be material but are likely to become so, often through direct engagement with NGOs. As stakeholder landscapes grow more complex, strong stewardship teams can anchor stability, helping companies navigate this complexity.
However, the largest asset managers appear to be heading in a different direction. They are increasingly leveraging technology to provide clients with direct access to proxy voting and tailoring stewardship plans to client preferences. For instance, BlackRock’s Voting Choice allows millions of shareholders to select from a range of voting policies, including an anti-ESG option labelled “wealth-focused”. They have also launched a climate-focused stewardship service, which some critics suggest may indicate a lighter emphasis on climate in their broader stewardship activities.
While empowering clients to participate in voting may raise awareness of these issues, it is concerning. Asset managers have a fiduciary duty to account for material risks, including climate risk, and delegating these decisions to clients may expose their savings to unnecessary risk.
Finally, collaborative engagement, which has been pivotal over the past decade, may become a collateral casualty in the “ESG Wars”.
While asset owners, particularly pension funds, are likely to remain engaged, the threat of anti-trust actions has driven several asset managers, particularly in the US, to withdraw from initiatives like CA100+. Though informal coordination may continue, it is unlikely that asset managers will formally rejoin such alliances until they feel confident that climate change collaboration won’t be deemed anti-competitive.
My hope is that, despite recent hiccups, asset owners and asset managers will continue to invest in their stewardship team, and actually double down on them. Stewardship professionals have now developed a wealth of expertise on complex ESG issues, and an equally important wealth of relationships across their portfolio companies. Wasting this capital would be a pity not only for the asset managers but also for the financial sector as a whole.
The post Stewardship in a Polarised Environment appeared first on ESG Investor.