[7]. And that helps to show whether or not something like carbon emissions is de minimis, it doesn't make a difference to the company, or is actually a huge fact. Slowly but surely, the effect of such groups is starting to be felt in boardrooms. But it's not quite active either, because a lot of ESG funds are following an index or a simple approach. It is often incorrectly said that the G in ESG, for governance, is old news for shareholder activism. That's BlackRock or Vanguard or State Street or us or a pension fund. Investor support for ESG-themed shareholder proposals has generally increased in the past five years. They have also adjusted their proxy voting policies correspondingly. You don't have an ESG problem. ", "Ultimately, the public markets are a team sport for investors. [11] The SEC has signaled that it will likely develop additional requirements for ESG-related disclosures of public companies. Our idea, though, with NETZ, was that a lot of the value to be created through the transition across sectors is going to come from big incumbent players who are transforming, who have figured out a strategy that puts them on a path to net zero and a path to create value while they're doing it. The GRI, Kuszewski explained, incorporated the Greenhouse Gas Protocol, which in turn defined Scope 1, 2 and 3 emissions. It holds the 500 largest public companies in the U.S. by market cap, so it looks nearly identical to what a lot of investors already have in their 401(k)s, already have their portfolios. This is on climate, on gender pay disparity, on human rights, the supply chain, and deforestation, to a whole host of racial equity, workforce issues. DivestInvest. Got a confidential news tip? And so, I think for a long time, ESG was seen as adding in some new interest outside of financial interests. And so, our idea is that, 'If that company is now not operating in a way that actually benefits those long-term investors, it's up to the investor to to vote, to engage, and sometimes even replace boards so that it will.'". Investors increasingly view corporate attention to ESG criteria as closely linked with business resilience, competitive strength, and financial performance. But the trend that swamps all of that is that all generations, millennial, Gen X boomer, everyone everyone is increasingly interested in sustainable investing to the point now where it's 80% of the population at large, it's nearly 99% of millennials. Something like $25 billion in the mid-2010s, now $13, $14 trillion of assets. This is an active, in the fact that you are taking positions, but you're also, as an investment committee, looking at those companies where there is opportunity for them to transform themselves into companies that have sustainability for the future and don't degrade the environment. ", "And so, December of 2020, we put forth a slate of four new directors, all of them at deep energy experience, but understood how you'd have to approach an opportunity like Exxon to help them transform their business in many ways so they can succeed not just for the next five or 10 or 20 years, but long into the future as they've succeeded in the past.
"There isn't really a need for new standards," she said. The new age of ESG may bring other innovations in shareholder activism. They're investing with their moral and ethical sensibilities, but they're also thinking long-term as well. ", "Now, how do we then, through insights that we derive, actually drive change at companies? Part of the reason is because fewer than one out of 10 retail investors who own shares directly actually vote. Companies and investors are converging, nevertheless, around certain practices and expectations. I want to be invested in companies that are going to be here in 10 years. A new report published by the new Climate Institute and Carbon Market Watch found that 25 of the world's most valuable companies, including Alphabet, Amazon, and Nestle, are making climate-related promises that they aren't even close to keeping. This compensation may impact how and where listings appear. It has also launched two ETFs that help retail investors like us participate in its efforts. 
I think that is one thing that's worth keeping in mind that as an investor, we still have to be grounded in reality, grounded in the energy transition, exactly how long that will take, how hard that will be. They'll die if they do, but they'll die if they don't, right, Michael? Is that a fair way to look at it? In the United States, the vast majority of shareholder proposals are made pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, which imposes topical limitations on proposals. Industry after industry are going to be transformed over the coming decades as the world reckons with climate change, and you've got big traditional researchers putting out figures that say, "It's would require $2, $3, $4 trillion dollars per year in incremental spending to able to reach net zero by 2050.' Give us a little sense of how that's made. In contrast, shareholders who solicit proxies for their own proposals have a comparatively free hand to make proposals on the topics of their choice and to say want they want to say about their proposals. 
So fascinating. There are also unknowns and potential pitfalls for the integration of ESG concepts into shareholder activism. ", "NETZ is a super-exciting, just-launched product from Engine No.1. All Rights Reserved. "Sustainable Finance Roadmap 2022-2024," Page 12. Only 7% are being cast by individual retail shareholders. Because, as our listeners know and as you know, you've been in the industry a while, so much ambiguity, it's alphabet soup when it comes to all the acronyms there. ", "So what's needed, Michael, in the industry to drive more change? Supreme Court's Ruling Against the EPA's Oversight and the Future of Emissions Regulations, Introducing the Express-o Awards with Sam Ro, Sustainable Investing From The Advisor's Perspective, Building a 2nd Half Playbook with Morgan Stanley's Mike Wilson, Responsibilities of Responsible Investing, Busting Through the Greatest Myths in Green Investing. That campaign went all the way through to the annual meeting in the spring of last year and ultimately we were successful in putting three new directors on the board. In May 2021, for example, Chevron shareholders voted in favor of a proposal put forward by Follow This to "encourage" the oil giant to cut its emissions. Kai H.E. I mean, there's something like a dozen proposals or more every year that's just by a hair, a couple of percentage points difference between success and not. And that Exxon's leadership, even at the board level, was an extremely impressive group of individuals, with backgrounds leading some of the largest companies in the world, but lacked an energy background relevant to actually helping to navigate this transition. Part of the problem is that, right now, most investors think in dollars and cents. We want to hear from you. As you say, public companies are run like little corporate republics, where shareholders, elect boards, boards appoint CEOs, CEOs execute strategy ultimately on behalf of shareholders. During the discussion, Sancroft International's Kuszewski hammered home the point that while uniform standards for measuring companies' performance existed, they weren't being consistently applied. Let's talk about VOTE, and let's talk about the NETZ ETFs. This observation is correct insofar as certain governance themes have been present in activist campaigns for a decade or more. The observation is incorrect, however, insofar as part of the G in todays ESG thinking focuses on the governance of environmental and social aspects of a business. "There is good agreement across the landscape about what the frameworks and the measurement protocols should be," Kuszewski said. Referencing the European Union's emissions trading system, Delbeke said that "the monitoring and the compliance was terribly important to create trust in the system. He is a frequent guest on CNBC, MSNBC, Yahoo Finance, and ABC Radio. These include white papers, government data, original reporting, and interviews with industry experts. Global Business and Financial News, Stock Quotes, and Market Data and Analysis. A Division of NBCUniversal. The Green Investor podcast is for informational and educational purposes only and does not constitute investment advice. (go back), 8See RBC Global Asset Management, 2020 Responsible Investment Survey Key Findings, at 5, https://www.rbcgam.com/documents/en/other/esg-key-findings.pdf. Investopedia requires writers to use primary sources to support their work. Another potential ESG-driven innovation would be for shareholder activists to avail themselves more frequently of the right to solicit proxies at shareholder meetings for their own business proposals. How do you decide what companies are morally virtuous or not? So, what kind of pressure Let's talk about ExxonMobil. It is here, and Engine No.1's brought a couple of ETFs, exchange traded funds, to the market to help retail investors like me, like our listeners, access this. So, these are evolutionary changes you are trying to bring about, not revolutionary, change your business model on the spot. Folks, we're going to link to the fact sheets on both of those ETFs, so you can check them out because they are very different than what you'll see across the industry today. Proponents of ESG-conscious operations are elaborating new standards and best practices related to corporate governance. And so, you can see it outperforms the 2020, underperforms the 2021, never by huge numbers, but nothing you notice. Successive editions of sustainability reports issued by companies over a course of several years will provide investors with an ability to compare ESG performance of individual companies over time and to compare companies performance. Environmental, social, and governance (ESG) criteria are a set of standards socially conscious investors use to screen investments. (go back), 7Surveys have found that institutional investors point to fiduciary duty as a driver in the integration of ESG in to their investment strategies. From high-profile figures such as Greta Thunberg to events like the COP26 summit, discussions about sustainability, the environment and climate change are perhaps more visible than ever before. They look like they're making that move right now. Most ESG investing today, nearly all ESG investing today is about what you have in your portfolio. So, they either have to get in line, or they can just be one of the great companies of the 20th century that never made it out. He is an award-winning business journalist who has previously worked as the Director of Business News at CNN, the Executive Producer of CNN Money, and a Senior Producer at Bloomberg Television. ", "In my experience talking with investors, many investors, especially on the retail side, they don't even know that there are annual meetings happening with their votes being cast on their behalf on issues they care about. Michael O'Leary is the managing director of Engine No.1, and our guest on the Green Investor this week. But it is possible that in coming years, the general public will pay attention when the same institution declines to support a campaign that is calling for greenhouse gas reductions emissions targets or another ESG-oriented improvement. There is evolving discussion around the particular appropriateness of audit committee oversight of particular ESG-related matters, such as the identification of material ESG factors and oversight of disclosures and disclosure controls and procedures. ", "Right. ", "Right. [6], Shareholder activists may deploy ESG concepts in their campaigns for various reasons. This is happening just as Morningstar removed the ESG label from over $1 trillion in investment funds, saying they don't meet adequate environmental, social, and governance standards. ", "It's amazing the degree to which climate has sort of become this Big Ten issue, where you'd be hard pressed today to find a corporate leader or an investor who do not at least pay lip service to the idea that companies need to understand how to navigate the energy transition. '", "I think the divestment movement that's particularly been focused on oil and gas and climate issues, that divestment movement has been unbelievably effective as a movement at creating huge amounts of focus on climate for investors. ", "Yeah. 
It's unclear why that should generate enduring alpha for years. An activist investor might genuinely believe that greater attentiveness to environmental and social factors de-risks operations, makes business more sustainable, and creates opportunities. They're trying to connect that value to core drivers of business success. Do they want a kind of satellite exposure, trying to earn outsized returns.
Moller-Maersk, Vodafone, and Deutsche Telekom are the only ones on track to near-complete decarbonization. But investors have kind of changed the way they think, and I'm painting with a broad brush, over the last five to 10 years as it relates to ESG, as it relates to climate change, as it relates to their sensibilities. The ESMA issued a report last week saying that it has observed a "mismatch" between what fund managers are telling ESG clients and their actual allocation strategies. The goal is to reposition its strategy, its future, so that five, 10, 15 years from now, it can be succeeding in a world that is decarbonizing. For Delbeke, capitalizing on the moment was key. It was, 'If you are the fifth-largest greenhouse gas emitter in world history, as Exxon was, and two-thirds of your revenue is coming from countries that have themselves set or are setting net zero targets, you don't have a sustainability problem. Thanks so much for joining the Green Investor.Really fascinating.". Is it better education? It has emerged as one of the most effective activist investors to come on the scene in decades, and it's putting pressures on companies across industries. Ultimately, it's nice if we supported it in the competition, and we can show this great competitive differentiation, but it doesn't get a whole lot done for companies or a whole lot done for stakeholders or the environment. Because these are long cycle businesses, you can't just go explore a well and dig it up in a couple of weeks and be pumping oil. This is companies like General Motors, that still today is one of the biggest emitters in the auto sector, no doubt, but has now made the ambition to go all electric by 2035, which, if they are successful, could take 200 million tons of carbon out of the atmosphere every year versus what would have happened otherwise. Yet the fact they are making them at all points to a shift in the mindset of some investors. I think a lot of people have come to recognize that, and one of the data points I point to is, if you look at shareholder voting every year at annual meetings, this past year, there were 11 proposals at public companies on climate issues that passed, that got over majority support. Over-under bets, also called total bets, are a wager that the points total for a game will be larger or smaller than a sportsbook predicts. During a recent panel discussion chaired by CNBC's Steve Sedgwick, Judy Kuszewski, chief executive of sustainability consultancy Sancroft International, spoke to the above point. With the world in an unprecedented energy crisis, top CEOs are searching for solutions, From EV batteries to coffee: Ideas about recycling and nature are changing how firms do business, The dust has settled on COP26. And so, the goal was never some sort of radical break with history. You want the change, and you want these companies to succeed in making that change. Liekefett, Holly J. Gregory, and Leonard Wood, Sidley Austin LLP, on, Harvard Law School Forum on Corporate Governance, on Shareholder Activism and ESG: What Comes Next, and How to Prepare, by Oliver Hart and Luigi Zingales (discussed on the Forum, The Illusory Promise of Stakeholder Governance, Companies Should Maximize Shareholder Welfare Not Market Value, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, https://www.ft.com/content/fa9946b9-371b-46ff-b127-05849a1de2da, https://www.ft.com/content/8e9f8204-83bf-4217-bc9e-d89396279c5b, https://www.morningstar.com/articles/1017056/sustainable-equity-funds-outperform-traditional-peers-in-2020, , https://www.blackrock.com/corporate/literature/publication/our-2021-stewardship-expectations.pdf, https://www.sec.gov/files/potential-recommendations-of-the-esg-subcommittee-12012020.pdf, https://www.washingtonpost.com/climate-environment/2021/03/17/biden-climate-change-economy, , https://corpgov.law.harvard.edu/2020/01/13/into-the-mainstream-esg-at-the-tipping-point/, https://www.rbcgam.com/documents/en/other/esg-key-findings.pdf, https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf, https://www.ga-institute.com/research-reports/flash-reports/2020-russell-1000-flash-report.html, https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure. Investors are 'looking carefully' at climate change: Sancroft's Judy Kuszewski, When it comes to standards related to sustainability, consistency is key, Gas or renewables? Examples of investors focusing on topics such as climate change, sustainability and the environment include Follow This, a Dutch organization which describes itself as "a group of responsible shareholders in oil and gas companies.". By integrating criticisms of ESG failures into campaign narratives, activists may gain additional traction with institutional investors at the ballot box. 2020 was a major year in the United States and worldwide for bringing matters of social justice and public health to the foreground of public interest. Over 90% of S&P 500 companies and 65% of Russell 1000 Index companies already produce a sustainability report. I think that's kind of a step in the direction of Robinhood saying, 'This would be an area of greater interest.' "Michael, I gave the basics from 50 thousand feet, but for the rest of us, explain what Engine No.1 is as you see it and how it operates. But what it's now allowed us to do is focus on climate, and the divestment movement has allowed us to take a step farther on the engagement path to say, 'For investors who are still in these companies for whom now, because the divestment movement, climate is a front and center issue, can we make the case that given companies destroying shareholder value by not focusing enough on the climate?' Get this delivered to your inbox, and more info about our products and services. [4] Investors have meanwhile lobbied governments and regulators in the U.S., particularly Congress and the Securities and Exchange Commission (SEC) requesting that they impose further requirements on companies to expand their ESG disclosures and deepen their commitments to ESG-oriented operating principles. Perhaps most significantly, there are open questions as to how shareholder activists can reconcile their relatively short-term investment horizons with ESG theses, which characteristically involve long-term value propositions. And so, if you look at the investing continuum from pure active to pure passive, a lot of ESG investing gets stuck straddling the middle, or it's not quite a passive fund because it has real deviation. (go back), 5See, e.g., SEC, Asset Management Advisory Committee, Potential Recommendations of ESG Subcommittee (Discussion Draft), Dec. 1, 2020, https://www.sec.gov/files/potential-recommendations-of-the-esg-subcommittee-12012020.pdf.
Is it more clarity on what ESG and SRI mean? ", "And this product, which is a concentrated, actively managed fund to try to generate returns in this product, we think by creating a portfolio of those sorts of companies, puts us in a better position to try and deliver attractive returns to investors. Data is a real-time snapshot *Data is delayed at least 15 minutes. (go back), 2See, e.g., Attracta Mooney & Patrick Mathurin, ESG Funds Defy Havoc to Ratchet Huge Inflows, Financial Times, Feb. 5, 2021, https://www.ft.com/content/8e9f8204-83bf-4217-bc9e-d89396279c5b. What sectors do you exclude? ", "Oh, absolutely. And so, we're in this kind of odd position of trying to actively erode our competitive advantage, trying to push other shareholders, other asset managers, to vote in a way that better aligns with the long-term interests of kind of pro-social, pro-environmental interests of a lot of the end investor.
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