Trump's withdrawal from the Paris climate agreement may prove to be futile as a wall of passive money is already rebelling on climate related issues.
The week before ExxonMobil's annual general meeting on 31 May, it emerged that Vanguard and BlackRock were considering voting in favour of a shareholder proposal that would require the energy group to begin publishing annual assessments of the effect of climate change on its business.
Exxon’s board had recommended rejecting the resolution, but two important firms that advise index funds and other institutional investors on proxy votes – Institutional Shareholder Services and Glass Lewis – backed the measure.
Investors were able to override management’s wishes as 62.2% of shareholders voted in favour of climate risk reporting, up from 38% who backed a similar proposal in 2016.
The case follows similar successes at Occidental Petroleum and electrical utility PPL earlier in May.
Support from BlackRock was credited for accomplishing this feat at Occidental, with the fund giant having opposed the equivalent proposal at last year’s meeting.
Indeed, according to analysis of regulatory disclosures by sustainability campaigner Ceres and data firm Fund Votes, neither Vanguard nor BlackRock voted in favour of any climate-related resolutions at annual general meetings last year, deferring to boards’ recommendations instead.
If the tracker titans are changing their approach to these issues, they will create a formidable alliance alongside fellow passive force State Street.
Earlier this year State Street Global Advisors president and chief executive officer Ronald O’Hanley wrote to corporate boards on the topic. ‘While we make case-by-case decisions when voting proxies, we will support climate resolutions if companies’ disclosure, practices and board governance structures are found to be inadequate,’ he confirmed.
The Ceres and Fund Votes research had found that State Street already backed 46% of shareholder proposals regarding climate change in 2016.
Goldman Sachs CEO Lloyd Blankfein is also now actively engaging on the issue of climate change, issuing his first ever Tweet in reaction to Trump's exiting of the Paris climate accord, it read:
'Today's decision is a setback for the environment and for the U.S.'s leadership position in the world. #ParisAgreement'.
Hardening 'soft law'
The pressure on index managers to become more assertive is also coming from legal experts who are increasingly demanding that passive funds exercise greater oversight of corporate behaviour.
Recent essays in legal journals on both sides of the Atlantic have made such a case this year.
‘Index funds should be required to think independently and vote in a way that reflects an informed judgment about what is best for their investors over the long haul – not just what the fund-family proxy unit or, even worse, a proxy advisor, has generically instructed it to do,’ argued Delaware Supreme Court chief justice Leo Strine in the Yale Law Journal.
‘By leaving institutions’ corporate governance roles as a merely private matter subject to best practices in soft law like the Stewardship Code, policymakers are able to de-socialise the problem of corporate scandals and savers’ investment expectations, framing them as market failures or market outworkings,’ warned Iris Chiu of University College London and Dionysia Katelouzou of King’s College London in the Journal of Business Law.
‘We, therefore, contend that the public interest in investment management, its outworking for savers and impact on the corporate sector are issues that require public policy and we make a case for regulating institutions’ shareholder roles under securities and investment management regulation. We argue that such regulation is able to introduce standardisation of certain expectations of conduct and best practices in order to reorient investment management towards serving the public interest and to overcome current governance and accountability deficits.'
'Steps are needed to govern those responsible for investment management in order to meet the public interest expectations of delivering long-term savings for investors and maintaining a sustainably wealth creating corporate sector for the future.’
Yet obliging passive funds to be more active with their shareholder rights does not provide any answers to the more difficult question of how they should vote.
And that question is multi-faceted. Do investors have any responsibilities beyond seeking to maximise their returns? Over what timeframe should those returns be measured? How will a given action, on a relatively simple issue like executive compensation let alone climate change, affect those returns or society more broadly?
At what point does this take passive investors away from the efficient-markets hypothesis and into the active management they have long derided?
Vanguard and BlackRock engaging boards and corporate management on social issues is to be welcomed, but ultimately their clients will have to decide how they wish their votes to be cast.
Given their myriad different interests and investment horizons, progress on this front is likely to be as slow as in the fight against climate change.