Asset managers would like fewer shareholder resolutions
Asset managers would like fewer shareholder resolutions
ESG proxy voting comes under scrutiny
This week opened with a mighty title for a press release: World's largest asset managers turn their backs on people and planet. It comes from ShareAction, which promotes responsible investment through shareholder activism. I love the reflexive emotional response it elicits:
No way! I’m a person. I care about the planet. World's largest asset managers – you bastards.
Asset managers have been talking about ESG for the better part of a decade. They've made it front and centre of their marketing efforts, and launched many, many products to meet demand. To put all this effort as a front would seem...odd? So what’s going on?
As it happens, just a little bit of numbers fudging.
ShareAction’s report did have some severe-looking data to justify that headline: In 2023, only 3% of assessed resolutions passed, down from 21% in 2021. Of the environmental resolutions assessed, just 3% passed last year compared to 32% in 2021.
Other numbers were buried in the back. Out of the 274 resolutions tracked as ESG, only 40% were over environmental issues. But it's the numbers that weren’t featured in the report at all that tell a fuller story:
Twice in the last two years, the Securities and Exchange Commission (SEC) has rolled back restrictions on the topics that shareholders can add to a company’s annual meeting agenda. According to Morningstar's analysis, these decisions radically increased the number of shareholder resolutions voted on at US companies in the 2022 and 2023 proxy years.
To make sense of the resulting changes to voting patterns, Morningstar looked at key resolutions – ones supported by at least 40% of the relevant companies’ independent shareholders. These exclude any strategic investors with large equity stakes, along with management and directors. Key resolutions are arguably a good measure to sense-check how a company's shareholders feel.
Morningstar found that average support of these key resolutions did fall, but not by much. However, the share of key resolutions nosedived. In previous years, one in three resolutions got enough shareholders stirred; this year – it was one in six.
If 84% of resolutions struggle to get organic support, you can see where BlackRock is coming from when, in its 2023 Voting Spotlight, it said:
“Because so many proposals were overreaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past.”
Look, if your name is ShareAction, ShareActioning is what you do. From your perspective, the more shareholder resolutions the better. But it's a point of view asset managers don't happen to share.
And if your name is BlackRock, it’s also true you have other tools at your disposal. For example, you get to choose the index to track, exclude shares from it, and decide how quickly you respond to changes in companies' ESG ratings.
So ShareAction’s real beef is not with changing the companies. Rather, it’s struggling to change how asset managers think about the tool of shareholder resolutions. They say – “We think you should intervene on all these issues!” while the largest asset shrug and say – "We disagree."
There’s been plenty of talk of how political ESG is getting. Equally, many of those issues are indeed political.
Companies know this really isn’t about them – and none more so than Shell. This week, Shell came up against a shareholder resolution to set tougher emissions target. This resolution has everything: it's 100% climate focused; it's got the support of 27 different asset managers; all the headlines made Shell out to be the bad guy. But Shell's not worried.
It says the shareholder resolution is “broadly unchanged” from the one filed last year. In fact, the activist group Follow This has pushed similar motions at Shell meetings since 2016 .
Could this repeated push eventually lead to change? maybe. Is that good enough? Not really. To drive a change towards sustainability, shareholder activism is one tool in asset-managers’ box. Not necessarily the best one.
Treasure Corner: Client Herding Behavior
Speaking of climate targets, this week two UK local-authority pension funds stepped up their commitments.
First was Avon pension fund, which brought forward its net-zero target to 2045, five years earlier than planned. The fund has been investing heavily in climate solutions, with £2bn invested between 2021 and 2023.
A few days later, Kent Pension Fund announced its target of net-zero emissions by 2050. The fund has about £8bn in assets, and is aiming to invest 15% of it in sustainable assets by 2030.
Both stories were reported by Professional Pensions, and their proximity is a good signal to any asset manager selling climate strategies, because pension funds exhibit herding behavior.
We know this thanks to a 2021 study titled Pension Funds’ Herding (by Dirk Broeders, Damiaan Chen, Peter Minderhoud and Willem Schudel), which investigated herding behaviors in Dutch pension funds.
Now, certain herding behavior is almost a given. The study defines weak herding as when pension funds have similar rebalancing strategies. Semi-strong herding is when pension funds react similarly to other external shocks, such as changes in regulation or monetary policy. It wouldn't surprise you to learn the researchers found evidence of both.
But the kicker is the third kind of herding behavior, the strong herding, where pension funds intentionally replicate changes they see other pension funds making. Researchers tested this hypothesis using two different models, and in both cases arrived at the same conclusion:
Pension funds of similar size present herding behavior in equity allocation over a 15-18 month period. And not in a minor way, either. The researchers state:
"We can conclude that when pension funds increase their equity allocation over the last 15–18 months with 1 percentage point on average, then pension funds with a similar size typically expand their equity holdings by 0.36 to 0.49 percentage point."
Meaning, it's probably a good time to call other local-authority pension funds and remind them of your climate-related products.
Also Happening
A simple way to dodge shareholder-activism issues is to get the private companies to do the nasty stuff. Nordic nations are famously competitive amongst themselves, so after Greenland’s coup last week, Norway was ready to bust some moves:
Norway’s parliament voted this week to allow a new generation of companies to mine its arctic seabed, and at least three startups are getting ready to apply. It’s expensive stuff, and public companies have been washing their hands of deep-sea mining. But there’s an awful lot of private-equity dry powder on the lookout for solid infrastructure investments.
Speaking of infrastructure investments, the big news this week was BlackRock's acquisition of Global Infrastructure Partners. A $12.5bn deal will get anyone's attention, but BlackRock is not alone. Citywire quietly mentions that 20 of the largest asset managers globally had launched a private markets fund in the year to the end of September. Out of those, 13 had grown their private markets arms through acquisitions in the preceding six years.
The SEC approved Bitcoin ETFs this week, and wanted everyone to know it's not happy about it:
"While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin."
Frantic trading ensued. To begin with, trackers are a pretty commoditized market; when your tracker is only tracking one thing, fee wars were all but guaranteed.
So on the first day, the Bitwise ETF got the most inflows, thanks to being the cheapest. The very next day, Franklin Templeton (who came fourth on first-day flows) cut its fees so that now it could claim to be the cheapest. At least for today, anyways.