The focus by investment managers on ESG produces no benefit and costs increased investment management fees - leading to lower investor returns
I posted this article a few days ago
I referred to this guidance by the Securities and Exchange Commission (SEC) whose purpose is to protect investors from fraud and instil investor confidence in the financial markets, the SEC earned its reputation from a history of enforcing securities laws.
I extracted these quotes:
Page 6 of 9 – says this:
“The Commission explained that an investment adviser may agree with its client to the scope of voting arrangements but that scoping the relationship requires the investment adviser to make full and fair disclosure and the client to provide informed consent.”
“Further, rule 206(4)-6 and Form ADV require an investment adviser to describe to clients its voting policies and procedures.”
“In light of the above, we believe that an investment adviser that uses automated voting should consider disclosing: (1) the extent of that use and under what circumstances it uses automated voting; and (2) how its policies and procedures address the use of automated voting..”
I detailed some of the differences between active and passive investment management as far as investment objective and fees were concerned, together with the mechanics of proxy voting by investment managers.
Here is more detail on how investment managers vote on issues proposed by boards of directors of companies in which they invest, on behalf of others and issues proposed by shareholders of those companies. Votes on issues proposed must be approved or rejected at general or special shareholder meetings to ensure that no changes are made without majority approval of the owners (shareholders) of a company.
From here: Proxy Voting: Where Does Your Fund Manager Stand on ESG Issues? | Morningstar “We’ve seen a sharp increase in the number of shareholder proposals on environmental and social, or E&S, themes this year. There were more than 250 E&S shareholder resolutions opposed by company boards in the year to June 2022, compared with 145 in the same period last year. The lifting of Trump-era restrictions on such shareholder proposals at the end of 2021 has been a key catalyst behind this increase.”
Note that “Governance does not feature in the analysis”.
“The number of these proposals gaining significant shareholder support is also on the rise. Out of this year’s resolutions, 140 gained the support of more than 20% of shareholders and 27 actually gained majority shareholder support.”
27 out of 250 E&S shareholder proposals were passed. The economic impact (cost benefit analysis) on the company is not quantified.
The passing of ESG “initiative” is likely to have the same sort of impact on companies as we have seen on consumers. Massive cost increases for no benefit which reduce the profitability of the company that adopts ESG measures. Quite the lose/lose.
the resolutions may have been highly significant – like sourcing electricity solely from “renewables” or more trivial like making more efficient use of recyclables.
There is no detail on proposals made by investment managers, acting as shareholder, if any.
More detail in the article, re-linked here.
So, that deals with shareholders proposals to change the behaviour of the companies they invest in.
A company’s management (board of directors) also puts up proposals for shareholders to vote on. These cover all sorts of issues from director remuneration to mergers and acquisitions.
“What Do Proxy-Voting Policies Tell Us About Managers’ Positions on E&S Issues?
The results of these shareholder votes often depend on what is in asset managers’ proxy-voting policies. These policies are typically written by specialist teams at each asset manager who work alongside fund managers to develop policies that best fit the asset manager’s investment objectives.
While proxy-voting policies mainly address governance themes, increasingly they also include guidance on how investors intend to vote on E&S proposals..”
So, where’s the beef? Remember we are talking about the behaviour of investment managers that must have informed consent from the people whose money they manage. It is not the investment managers money. Large investors have specific investment management agreements with investment managers. Investors in Exchange Traded Funds (ETFs) and mutual funds consent via the terms and conditions of these vehicles that they sign when they pay money over to the investment manager.
“Our latest research paper analyzes the level of focus on these E&S themes in the current proxy-voting policies of 25 asset managers, including 12 based in the United States and 13 based in Europe.”
“The 25 managers have $54 trillion of assets under management, with the U.S. asset managers making up almost three fourths of the total. The “big three” index asset managers—BlackRock, Vanguard, and State Street—account for $23 trillion of AUM; all three have a Medium E&S focus. Managers with a High or Very High E&S focus (shown in dark green on the chart above) account for $9 trillion of AUM. Except for AllianceBernstein, all of those are based in Europe.”
The European managers have fewer assets than American ones, but are “bat-shit” crazy about ESG issues – so is AllianceBernstein.
“Franklin Templeton, and Invesco—tend not to have detailed E&S policies. They often indicate that operational matters are left to management discretion, giving case-by-case consideration of support for shareholder resolutions on E&S issues.”
There’s lots more detail and some pretty graphs in the article. There is an embedded link to a detailed report but the splash page link to the report does not exist.
It would be valuable to see the results of an actual company meeting with votes cast by shareholders, split by proxy votes from investment managers and other shareholders that own the company.
Does ESG improve risks and returns on investments?
From a detailed analysis undertaken by the passive investment manager Vanguard here: How does investing in ESG impact performance? | Vanguard UK Professional we have this:
“Overall, these initial findings suggest that ESG funds neither have altogether higher nor lower risk-adjusted returns than the broader market.”
And this: “..higher ESG fund management expenses tend to be associated with lower net alpha.”
Bottom line? The focus by investment managers on ESG produces no benefit and costs increases investment management fees - leading to lower investor returns.
Vanguard concludes with some useful advice:
“Our view is that investors should assess potential investment implications on a fund-by-fund basis, both on an absolute basis as well as relative to the fund they may move away from as a result of their ESG investment. They should also understand the portfolio implications of deviating from a broad market index and what that means for the risk and returns they can expect.
The most important consideration in selecting an approach is likely to be unique to each investor. There is no one-size-fits-all approach and the importance of goals, balance, cost and discipline will remain key to building a portfolio.”
Although Vanguard is a very large actor in the passive investment management space, in my view, the position paper is of high quality with little bias. It has several useful references in footnotes and is soundly based.
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STOP PRESS: Check out this ZeroHedge article by Legal and General Investment Manager, Eugenia Unanyants-Jackson
Understanding ESG Objectives And Goals In The Era Of Greenwashing | ZeroHedge
https://www.zerohedge.com/political/understanding-esg-objectives-and-goals-era-greenwashing
The virtue signalling could power entire wind farms.
ESG just seems like carbon offsets, a way for affluent people to feel virtuous about continuing to disadvantage the environment and the disenfranchised in order to remain comfortable.