To all responsible investors: “Our ask is simple: please show your stewardship mettle”

Jérôme Tagger on how to (better) prevent surprises in 2020

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Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for the New Year. 

At Preventable Surprises, we could feel good about 2020. A lot depends on what you, responsible investors, choose to do. This is not overstated. Our ask is simple: please show your stewardship mettle.

There is plenty to be cheerful about in the world, as Bill Gates and Steven Pinker remind us: childhood mortality has decreased dramatically. Access to energy, water and sanitation are all growing at a fast rate and yes, in some ways, it’s been the best year ever.

But who would look exclusively at the assets side of a balance sheet to proclaim a company healthy? 

Carbon emissions are at an all-time high, and so are global temperatures. COP25 was a big disappointment. The Amazon rainforest is burning. Australia is burning. California is burning. Moscow is experiencing its warmest winter in 140 years while Delhi had its coldest day for more than a century in December. One million species are under threat – ecocide is not an exaggeration. Global hunger is on the rise. We’re still trying to figure out the democratic toll of social media, disinformation is becoming a way of life, and nationalism and populism – stoked by economic insecurity and inequalities – threaten governance and economies on every continent. 

Meanwhile, ESG is booming. ESG broke into the top 10 keywords of Investopedia (alongside Jay Z and Karl Marx). Assets flows to ESG and impact financial products are at an all-time high

But managers overseeing this magnitude of ESG assets now need to address the ‘liabilities’, and to have real world impact at a commensurate scale.

"There is now a serious risk that ESG funds overpromise and underdeliver, and that the industry collapses under the weight of its bad apples."

At Preventable Surprises we’re precisely focused on these systemic risks, the inflating liabilities and hidden, off balance sheet risks. We seek to help responsible investors better understand them, but more importantly, to do something suitable about them.

Here is our non-exhaustive wish-list for investors, to prevent surprises in 2020. As examples, we’re highlighting ESG heroes named by our network in recent weeks. Interestingly, there’s a good overlap between what needs to be done and what the best in the community are already doing (sadly there’s not enough space to mention everyone, but there will be other opportunities). 

In 2020, we feel look forward to:

1. More transparency about the impacts of ESG integration.

ESG integration is often a black box. Fund managers propose sustainable investment products but what is often unclear (or marginal) is what impact ESG integration has on sustainability and systemic challenges. At the current scale of assets and client interest, there is now a serious risk that ESG funds overpromise and underdeliver, and that the industry collapses under the weight of its bad apples. We can still ensure the baby is not thrown out with the bath water.

"Focusing on single issues and companies can have an important educational effect but it can also be the stewardship equivalent of ‘Whack A Mole’."

2. Improved proxy voting records.

Recent research by Ceres and ShareAction show inconsistent voting practice on climate disclosure, with behemoths Capital Group, T Rowe Price, Blackrock and JPMorgan at the bottom of the pile. We believe in shareholder democracy and we dislike box ticking, but the gap between leaders and laggards is significant and the laggards’ voting record is widely out of line with their public commitments to climate risk and wider responsibility. The corporate sector is miles away from properly addressing the climate challenge, and there will be no progress if powerful investors continue to be part of the problem. So we are encouraged to see Tim Smith challenge the mega managers at their AGMs.

3. More systemic thinking.

It’s good to see efforts like the World Benchmarking Alliance take on systems transformations, InfluenceMap on corporate lobbying or the FAIRR taking a broad view on BigAg’s future. Focusing on single issues and companies can have an important educational effect – take the powerful examples of Louise Rouse, Brynn O’Brien and Adam Matthews on corporate capture – but it can also be the stewardship equivalent of “Whack A Mole”. To have real world impact, investors should also support sector or market wide initiatives, which is why we’ve long advocated for sector-wide AGM resolutions.

4. Deeper and more long-term engagement with companies.

Sir Christopher Hohn updated The Children’s Investment Fund Management’s ESG policy, as it relates to climate, requiring companies to disclose carbon and GHG emissions, including targets for emissions intensity reduction and absolute level reduction – basically requiring companies to have Paris-aligned transition plans, a long-standing proposal from Preventable Surprises.Jérôme Tagger speaking at RI Americas 2018

We are delighted TCI will vote against all directors of companies that don't do so and against auditors where the reports fail to account for climate risks. We also admire the resilience of Natasha Lamb at Arjuna Capital with long term engagement for example on pay equity, getting Citi to take the lead on closing the gender pay gap. Our network also praised Victoria Barron at Newton Investment for raising ambition on human rights in the supply chain of minerals feeding the low carbon transition, and Jeff Ubben at Value Act Capital in California, for taking on the “focus fund” approach to improving corporate culture at leading companies.

5. Owners take responsibility for fund manager selection.

We’re delighted to see Hiro Mizuno of the Japanese Government Pension Fund allocate mandates involving criteria based on ESG expectations, including on shareholder engagement. As reported, legacy managers like Blackrock lost business, new ones like LGIM stepped in, no doubt partly due to their Climate Impact Pledge (Sacha Sadan of LGIM was also one of our networks’ ESG heroes). We love the recommendation from TCI that asset owners fire investment managers who do not vote against board directors at those companies that fail to disclose carbon risks.

6. Bid farewell to investor free-riders.

We are so very tired of headline trillions – we’d much rather billions were seriously committed to proper action. We’re inspired by Lauren Compere’s focus on the role of banks in a low-carbon future and on human rights in the Equator Principles. 

7. A step change in transition finance.

News of an impending recession may – or may not – have been exaggerated. Without question, the current low rate environment makes for a great time to tackle climate change. Meanwhile, phasing out coal is a global priority and, if Goldman Sachs can stop financing thermal coal, then others can as well. It can be heartbreaking for communities, but there are blueprints for a Just Transition. It will take advocating more forcefully for a price on carbon. The step change is all the more since rising inequalities and their populist exploiters are making it much harder to address the climate crisis.

8. Decisive voices on the future of capitalism.

If Ray Dalio can find common ground with labour groups in thinking that capitalism needs fixing, then it’s high time for investors to speak up and say how. They must level with the companies who claim the high ground on corporate purpose, and hold them to account. In the US, they must legitimise their own voice before the SEC shuts them down.

For this and other reasons, the window for investors to address ESG related systemic risks might be closing. 2020 is a good time for you, responsible investors, to show your mettle.

Jérôme Tagger, the founding Chief Operating Officer of the Principles for Responsible Investment (PRI), is the CEO of think-tank Preventable Surprises.