This article is featured as part of IFA Magazine’s celebration of World Earth Day.
Rize ETF co-founder Stuart Forbes writes that major asset managers could ‘change the world’ in just a few years if asset management leaders start publicly naming and shaming their beneficiary companies , then to use ESG strategies to carry out environmental actions and social change.
But, for the major players, it requires a reshuffling that they seem too afraid to do.
More and more fund managers are adopting ESG strategies that involve them “engaging” with the companies in which they invest, with the aim of getting these companies to clean up their environmental, social and governance actions. Understandably, many investors take comfort in having investment professionals take on this role and, in doing so, use their money to try to make the world a better place.
But the stark reality is that, despite the warm and fuzzy words, “the pledge” has done nothing to mitigate deforestation and biodiversity loss, catastrophic fires, melting ice caps and increasingly severe weather events. more erratic patterns that signal the escalation of global warming and the general degradation of our natural world.
Something has to change. Commitment must become more militant, more public. He needs big scary teeth.
Too little, too slowly
Let me elaborate. While the engagement, discussion and pressure of institutional investors can influence corporate behavior over time – particularly if the people who engage are highly knowledgeable about environmental and social issues – public exposure and shaming companies with bad practices could be a much faster and more effective game-changer.
Why? Because big public companies like Coca-Cola and Unilever only care about their carefully curated brands and their public reputations: that is, the things that can destroy consumer demand for their products and, therefore, , their income.
As a relatively young boutique asset manager, we don’t have the same level of access to megacaps as large, established asset managers. However, we can still make enough noise for companies to sit up and take notice. Not only do we engage directly with these companies, but we also encourage our own investors (private banks and wealth management companies) to do the same.
What about disinvestment?
If the world’s leading asset managers, BlackRock, Vanguard, UBS, State Street and Fidelity, looked at their so-called sustainable portfolios and dumped their holdings in companies like Coca-Cola, Nestlé, PepsiCo, Unilever, Mondelez (the 5 biggest polluters of single-use plastic on earth), explaining precisely what companies needed to do to regain a place in their portfolios, it would no doubt focus the minds of those boards of directors and all remaining shareholders. The impact would be considerable.
But it is not that simple. Large investment companies are part of a complex web of financial organizations; their clients are giant pension funds, sovereign wealth funds and other investment managers, and these clients expect their assets to be managed prudently through balanced equity portfolios that follow wealth of their benchmark stock market indices.
Such expectations mean that many large asset managers believe their hands are tied to a large extent and cannot take divestment action unless the boards of their institutional clients are themselves. prepared to accept such drastic action for the benefit of the planet or society. We think that’s unlikely to happen until corporate boards are less male, pale and outdated, and much more representative of the community in which they operate.
However, while we accept that outright divestment has its challenges, we believe there is much more that these asset managers could do to publicly name and blame companies where change is not happening. By making their commitment known in the public eye, these asset managers could begin to rebuild trust with activists and the wider community who are fed up with the relentless greenwashing.
Vanguard and Blackrock are Coca-Cola’s second and third largest shareholders. So why don’t they publicly demand that Coca-Cola get rid of plastic bottles within three years rather than let Coca-Cola’s head of sustainability off the hook by stating that Coca-Cola has not intending to stop using plastic and stating that consumers prefer this. By the way, that statement was one of the most absurd things I have ever heard in my life!
The reality of “commitment”
It’s not hard to see how low engagement is in practice. In the recent past, we have participated in engagement calls set up by the global disclosure organization CDP, in which fund managers listen to presentations by companies and then have the opportunity to interview them. In the last couple I attended – for a large beef producer and a palm oil producer – there were representatives from a whole host of asset managers on the call, but only two of asked us questions at the end. I was one of them.
It’s not surprising. Employees of large corporate asset managers are simply not in a position to ask provocative, off-the-cuff questions. They must listen and report, so that a committee can formulate a corporate response. Moreover, these companies operate in an extremely competitive environment, in which profit must take precedence over the preservation of the planet.
So ‘engagement’, while it sounds collaborative in theory, is all too often a rather bland affair in practice. Despite this, asset managers tend to take every possible opportunity to showcase their ESG credentials when it comes to marketing to potential investors. It’s no wonder that engagement is so widely seen as a valid pathway to better business practices; but in truth, it has done nothing to mitigate climate change or reduce deforestation and biodiversity loss.
The land is worse off than it was five years ago. So much more could be done, and so much faster, if major asset managers began to publicly hold their holding companies to account for the emissions, deforestation and pollution for which they are directly responsible.