The Corner

Economics

ESG on a Tear, But No Boohoo (Maybe)

A sign for BlackRock at their building in New York City (Lucas Jackson/Reuters)

The attempt to legislate for society via shareholder resolution rather than old-fashioned elections trundles on.

A week or so back, S&P Global reported that BlackRock, the world’s largest asset-management company, and, these days, one of the most prominent advocates of “socially responsible” investing (SRI), had been voting the shares that it controls in the way that it has been promising:

BlackRock Inc. voted against dozens of management recommendations during the 2020 shareholder proxy season after finding that those companies were not making enough progress on climate issues.

In a report released July 14, the world’s largest asset manager said it had identified 244 companies . . . that “are making insufficient progress integrating climate risk into their business models or disclosures.”

Nearly 80% of those companies were placed “on watch,” a classification that BlackRock uses to tell those management teams that they have 12 to 18 months to meet its climate expectations or risk facing voting action next year. For the remaining 53 companies, BlackRock took several material actions against management including siding with shareholders on their proposals, voting against board members and raising governance concerns. The companies that BlackRock took voting action against during the 2020 proxy season came from a mix of industries, though energy dominated that cohort with 37 companies, according to the report. BlackRock also voted against proposals at seven utility companies, four industrials companies, four materials companies and one financial firm.

“A wide variety of investors, including BlackRock, have expressed their concerns about the investment risks of insufficient climate risk management,” the company wrote. “In 2020, we took voting action against those companies where we found corporate leadership unresponsive to investors’ concerns about climate risk or assessed their disclosures to be insufficient given the importance to investors of detailed information on climate risk and the transition to a low-carbon economy.”…

With $6.467 trillion in assets under management, BlackRock is one of the largest shareholders at most publicly traded companies in the U.S. As a result, BlackRock has faced pressure from climate activists for years to use its position to introduce sweeping changes at its portfolio companies. Fink’s January letter sent a clear message that climate, as well as other environmental, social and governance issues, would be paramount in BlackRock’s stewardship going forward.

“Climate change has become a defining factor in companies’ long-term prospects,” Fink wrote. “In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.”

A “defining factor.” Really? It’s not necessary to be a climate ‘denier’ (FWIW, I’m a ‘lukewarmer’), to think that statement might owe as much to ideology as to science.

In one sense, albeit a self-fulfilling sense, Fink is right, however. If enough investors convince themselves that they should not be putting money into assets deemed to be responsible for climate change, then (1) whether they are right or wrong about climate change, or, (2) perhaps even more importantly, whether or not changing corporate behavior in the manner that they want will make any material difference to the way that the climate changes, their unwillingness to invest will still depress the value of those assets now deemed to be unacceptable.

Bloomberg Green (sic):

The Mt Arthur coal mine in Australia is one of the world’s best. It’s got plenty of reserves and the low-cost supplies produced there are easily shipped to Southeast Asia, where there’s insatiable appetite for the fuel.

Yet owner BHP Group has a problem: It’s struggling to find a buyer willing to pay the right price.

The world’s biggest mining company’s unsuccessful effort over the past year to offload the asset highlights the predicament producers are in. To bow to mounting investor pressure to exit the most polluting fuel, BHP may need to sell a profitable mine for much less than it believes it’s worth. . . .

Coal-asset values have collapsed quickly. Rio Tinto Group sold its last coal mines for almost $4 billion just two years ago amid strong interest from big miners and private equity groups. Now rivals BHP and Anglo American Plc risk paying the price of waiting too long.

“We could have exited a few years back, and we probably would have got a better price, but we’ve also made good cash flows from what are good assets,” Anglo American Chief Executive Officer Mark Cutifani said. “How we exit is more important to me, in terms of stakeholders and reputation, than getting an absolute number on the bottom line.”

It appears that “stakeholders and reputation” matter more, at least where this is concerned, than the bottom line.

That sounds like a comment from a CEO who has forgotten who owns his company and for whom, therefore, he works, at least in theory. That would be the shareholders.

Meanwhile, there’s been some embarrassment in that what is probably the most important subset of SRI, so-called ESG investing, where investors look at how companies shape up against certain somewhat variably defined environmental (‘E’), social (‘S’) and governance (‘G’) criteria.

The Financial Times:

Just weeks before Boohoo was hit with fresh allegations about poor working practices in factories that make its clothes, MSCI gave the UK fast-fashion retailer a clean bill of health.

The rating and index provider reiterated Boohoo’s double A rating — its second-highest ranking — while highlighting how it scored far above the industry average on supply-chain labour standards in a June update of the online retailer’s environmental, social and governance ranking.

That exceptional rating — which placed Boohoo among the top 15 per cent of its peers based on ESG metrics — as well as the decision by so-called sustainable funds to invest in the retailer has come under fire in recent weeks after the Sunday Times claimed garment workers at a Leicester factory making clothes for one of Boohoo’s brands were paid below the minimum wage and suffered poor working conditions.

Boohoo has since announced an independent review of its UK supply chain, said it had not uncovered “evidence of suppliers paying workers £3.50 per hour”, and alleged there were inaccuracies in the investigative reporting. . . .

Several asset managers pointed to Boohoo’s good ESG ratings, both from MSCI and others, as a factor in their investment decision even if some say they also carry out their own analysis.

The influence of ESG rating providers has grown significantly in recent years in tandem with an explosion in demand for sustainable investing, as groups from large pension funds to retail investors look for investment products that do good as well as generate returns.

We will have to see what (if anything) the review turns up, but this, from the London Times, wasn’t reassuring:

Investors who bought Boohoo shares because of its high ethical ratings missed a “clear red flag” that should have alerted them to problems in its supply chain, a leading City broker says.

In a highly critical research note, Liberum said some of the fast-fashion group’s institutional investors should have queried limited disclosures on the sources of its cut-price clothing.

The company has won a loyal following among ethically minded shareholders, thanks to rankings on environmental, social and governance (ESG) standards. . . .

There are a lot of questions that can be asked about ESG, ranging from issues of fiduciary duty, to the fees charged on some ESG products, to the logic of bundling E, S and, the relatively uncontroversial G together, both from the point of view of performance (there is some evidence that suggests G adds to performance, while E and S detract) and logic. What’s more, sometimes the dictates of E and S can pull in opposite directions. The relative weighting attached to the E and the S can also lead to very different results. There can even be disagreement on how to score within a single category.

The Irish Times:

“MSCI gave Tesla a near-perfect score for environment, due to its emphasis on the low carbon produced and its clean technology,” notes the SCM report, “whilst FTSE gave it a ‘zero’ on environment as it only rates the emissions from its factories [something that in fact is heavily related to Tesla’s disclosure policies]”.

All this has produced rich pickings for the ESG ratings agencies. They are just part of the profitably flourishing eco-system that SRI has generated. They have, of course, a vested interest in seeing that market grow.

Not that they have to worry about that for now.

The Financial Times:

More than 360 new ESG-focused funds were launched by asset managers across Europe last year alone according to data provider Morningstar. Investors have piled into sustainable funds, which pulled in a record-breaking €120bn in Europe last year — 2.5 times the amount in 2018.

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