Putting Principles Before Profit – ESG Shifts the Baselines

Climate and diversity are increasingly on the agenda of annual general meetings. Shareholder activists are piling on the pressure and demanding they have a say on corporates’ environmental proposals. And they are forcing fund giants such as BlackRock and Amundi to take note of their concerns and act upon them. Have we reached a breaking point – or a tipping point on this emotive subject?

Listed multinationals with large carbon footprints are now facing formidable opponents. Some activist investors are trying to push corporate management to change course. Some, including British billionaire philanthropist and hedge-fund manager Chris Hohn, are trying to launch ambitious campaigns based on the ’Say on Climate’ concept.

This is similar to the ‘Say on Pay’ campaign, which allows shareholders to express their views on their companies’ remuneration policies AGMs (annual general meetings). Similarly, companies must take their responsibilities in the fight against climate change seriously.

By obliging general managers to present plans to reduce CO2 emissions and by requesting an annual report on the progress made, shareholders are forcing companies to change, if they do not do so of their own accord. The shareholders want to have the opportunity to fire managers who are in default. They are also aiming to have at least 100 of the largest publicly traded companies in the US to adopt a clear climate plan by the end of 2022. BlackRock, as the world's largest fund manager, intends to impose this type of climate strategy. However, fund managers rarely vote on ESG (environmental, social and governance) measures at AGMs. Managers need to deliver and avoid false promises.

Which approach works best?

But the tide has turned since the health crisis began. Managers want to use their active vote to make a difference and make it visible. No more working behind the scenes. Think of the AENA, the world’s largest airport group, which has been subjected to a ‘Say on Climate campaign against it by Blackrock. The AGM is therefore becoming the scene of these ESG confrontations. In the US, the rule allowing any shareholder holding at least US$2,000 of shares during the year to place a proposal on the agenda has changed the situation. How the situation is handled remains a question of culture. The indirect, behind-the-scenes, bilateral strategy works better than the direct approach during an AGM where the risk is binary – the proposal either passes or falls. It is becoming increasingly common to ask questions about climate, health or working conditions, for example.

Green watchdogs

Financial watchdogs across Europe are sharpening their scrutiny of potential greenwashing in the investment industry as a result of rising concerns that capital is being deployed based on misleading claims. There is an avalanche of new private money pledged towards tacking climate change. It has prompted regulators to step up their work on setting standards to ensure banks, insurers and asset managers provide clear disclosures on the environmental credentials of the investments they are pitching. Green investors can no longer rely on rules of thumb. The new announcement of the International Financial Reporting Standards’ (IFRS’) International Sustainability Standards Board (ISSB) is a proof of this clear will. If you (properly) measure the green footprint and ESG maturity of a company, results will happen.. Nowadays, there are strong incentives for any corporate to be green – and the race to be seen to be so is extremely competitive.

Statistics and shifting baselines

We are therefore seeing a rise in the power of activist shareholders who defend ESG strategies and punish companies with a non-ESG culture. Millennials (those born between 1982 and 2002) will also completely change the situation because they have no qualms about making their voices heard.

Bank-based asset managers are now offering only ESG (or pseudo ESG) funds. Shell, Total, Rio Tinto and HSBC have been under attack from shareholders for taking action against climate change. The Black Lives Matter movement is rooted in diversity and is another catalyst for profound social change.

We've even heard of racial auditing at Amazon, Johnson & Johnson and other major banks. Rating agencies and news organizations frequently publish sobering statistics that raise pertinent questions. Let’s face it, the search for maximum profit is no longer the only selection criterion used by potential shareholders. It is a pity that it is activist organizations, such as ShareAction, that shift the baselines, more than the companies themselves.

Institutional investors are also systematically voting in favor of climate change proposals or those that are ESG-friendly. Analyses that show that the most ESG-virtuous companies perform better or are more profitable than others. Performance will also help convince shareholders, but also, more importantly, management. There is still a long way to go. These are all factors that, when combined, will enable Europe to take the lead in terms of ESG.

By François Masquelier, Chair, EACT 

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the EACT.