The Financial Times’s Camilla Hodgson asks whether there is “a clash between ESG considerations and overall investor priorities.”
Only within ESG world could that be anything other than a rhetorical question. Of course there is a clash. ESG (a variant of “socially responsible” investing under which prospective or actual portfolio companies are measured against a set of environmental, social and governance criteria) is (with the partial exception of governance issues) the antithesis of what most investing is supposed to be about, which is the generation of economic return.
There is, of course, room for “socially responsible” investing, but that is a separate category of investing designed (to oversimplify things somewhat) for those prepared to give up some of the potential financial return from their portfolios in exchange for ensuring that their money is not put to work funding activities of which they disapprove.
Hodgson’s question was triggered by the response of proxy adviser ISS to a forthcoming shareholder vote at Bank of America.
Hodgson:
On a proposal to impose stricter fossil-fuel financing policies, ISS has advised sustainability-focused investors to vote in favour — while simultaneously recommending the opposite for shareholders in general.
The conflicting advice was published ahead of BofA’s annual general meeting next week, in relation to a shareholder proposal — filed by investors including Trillium Asset Management — asking the lender to align its fossil-fuel lending policies with achieving net-zero emissions by 2050.
Almost identically-worded proposals have been filed at five other major banks, including Goldman Sachs and JPMorgan Chase. Last week the $280bn New York State Common Retirement Fund called on shareholders to back the six resolutions.
In its guidance to “socially responsible” investors, ISS said voting for the proposal would “help ensure stronger alignment between the company’s net zero goals and its policies and actions” and “provide shareholders with a better understanding of the company’s management and oversight of related risks”.
But ISS’s benchmark advice for general shareholders went in the opposite direction, suggesting that they should be satisfied by “the company’s current commitments to low-carbon economy and expected goal setting”.
Leaving aside the question of whether any company with a majority of shareholders primarily interested in economic return should have commitments to a “low-carbon economy” (spoiler: no), ISS is doing the right thing here. It is simply recognizing that different investors have different objectives. The conflict is between the shareholders — not within ISS — and it can be resolved the old-fashioned way: by a vote.