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We have our priorities wrong by not focusing engagement on governments

Talking to companies means policymakers can avoid making tough decisions, argues Joel Moreland

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This article is the first in a series of comment pieces on the State of ESG, responding to RI Co-Founder, Hugh Wheelan’s article: Blackrock’s former sustainable investing CIO Tariq Fancy is wrong that ESG is spin and marketing hype.


I really enjoyed my time at the heart of responsible investment at the turn of the millennium on the Henderson SRI team that spawned many of the doyens of the industry. We inspired our clients and, I believe, made a difference. I’m delighted to see responsible investment thriving. I’m also still involved as an early-stage green investor and give pro bono support to finance campaigners who push asset owners towards responsible investment services.

But I disagree with Hugh Wheelan in his recent piece arguing that Tariq Fancy, the former Blackrock CIO for Sustainable Investing (who I don’t know), was wrong when he said the current hype around responsible investment is actually doing harm.

I think Fancy is right, and that responsible investment is maybe inadvertently doing more bad than good by delaying political action across environmental and social issues.  

I have seen plenty of comments online that this is just a Blackrock issue, or that it only applies to those using ESG data blindly, etc. However, this is not the case; you can still be part of the problem even if you are investing in sustainable themes, if ESG is fully integrated across every investment team, if you are members of every sustainable finance initiative going, or if your CIO has spoken in Davos!

An example of the damage done is the hype around using an engagement only approach with pure fossil fuel companies. It is without historical precedent that a sector has transitioned its core business model en masse, even with government intervention. Therefore, to do this by engagement alone in the absence of sufficient government action is beyond optimistic. The UK pensions minister, Guy Opperman, loves this ‘engagement only’ narrative. It’s easy to understand why: it avoids the government having to take tough decisions in the real economy. The responsible investment industry needs to take its significant share of responsibility for this misconception and change its behaviour. If you can square your fiduciary duty with using engagement alone - and it would take forceful stewardship of a kind we don’t generally see - that is fine but be clear that it is unprecedented, high risk and requires significant government action.

Investment makes an important contribution via the efficient allocation of capital, but it is not designed to make the environment or every person in the world's life better and is actually part of a system that is more likely to take advantage of bad working conditions and freedom to pollute to boost profits. This failing is well known but we can usually rectify it through laws, regulations and taxation (on some issues society leads and politicians follow, and sometimes it is the other way round but the order is not relevant here). After some costly mistakes I realised that in responsible investment we are generally just riding this wave of improving social and environmental regulation. As a keen surfer when I was young, I know you need to scan the horizon for the next ‘set’ in order to position yourself where the peak (first break) will be and start paddling furiously just before the wave comes.

I think Fancy is right, and that responsible investment is maybe inadvertently doing more bad than good by delaying political action across environmental and social issues  

Engagement with companies is vital to ensure compliance with existing laws, pre-empt future laws and ideally go beyond what is required (although the latter is usually limited by competitive pressures and can be a trigger for activist investors; witness Unilever and Danone recently). Governments have the power to both change laws and ensure compliance so their impact is always bigger than investors who have much weaker tools to ensure compliance and can’t write laws.  

Hence, investors should focus their engagement on governments. It is also more efficient to focus engagement here because there are tens of thousands of companies in the world who issue securities and only hundreds of governments (regional, national, state and cities). I welcome groups like the PRI engaging with governments but overall the responsible investment industry spends vastly more time on company rather than government engagement. This seems like a bad investment of time to me.

Some might argue that asset owners and managers have a remit to engage with companies as shareholders (and more recently as bondholders) but no remit to lobby governments. I disagree because on many issues on a national, and often international basis, the views and interests of their members (e.g. in a pension fund) align with those of the voters/general public. For example, on climate change the majority of people everywhere want a low carbon transition, and when they hear about a fair/just transition they want that too, which is a solid mandate for action. If investors want to double check, they could easily consult their members as has happened in the Netherlands. 

I accept that the skills and structures are in place to facilitate engagement with companies but two decades ago there were only a handful of practitioners (who were mostly ignored by companies). It will take some retraining, learning from government lobbyists, and creating new structures and processes. But there are examples already, such as the deforestation letter sent to the Brazilian government last year by investors.

To be clear, I’m talking about responsible investors encouraging regulation in the real economy, not more regulations to green the financial system. The latter is vital but can only ever be a supporting act to the former. Today though we seem to have put the cart before the horse: i.e. we had the HLEG on sustainable finance before we had the EU Green Deal. I suspect the historical analysis will show many more Euros shifted from dirty to clean because of the Green Deal (I appreciate there is some overlap, such as the taxonomy). Put simply, the responsible investment industry needs to be advocating at scale for these real economy changes.

Politicians, the media and civil society (and maybe even industry lobby groups) will say the motivation is purely financial but if the engagement with government is transparent and the portfolios similarly visible, then it can be made a virtue rather than a vice.  For example: “We want X change in the rules, our members want this to happen and opinion polls show the public do too and if it happens then you can see from the fund holdings that our pensioners will benefit twice over: they’ll have a bigger retirement pot and a better world to retire into.”

A switch in focus from company to government engagement has to be championed by asset owners because asset managers will need to have the mandate to change to avoid upsetting incumbent industries (they issue pension mandates too). Asset managers could also innovate in this area. I look forward to continuing the debate and particularly to hear from academics who have studied these issues more rigorously than I have and also from corporate executives who have experience of lobbying governments. 


Joel Moreland is a Principal Consultant for Social & Environmental Finance




Responsible Investor will be holding a State of ESG discussion panel at the RI Europe conference, running from June 14-18. To pre-register for the event, click here

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