Asset managers and pension funds increasingly are pressing publicly traded companies to adopt policies on environmental, social and governance issues, and a handful of groups have launched a new coalition aimed at pushing back against that trend.
The Main Street Investors Coalition believes the focus of many shareholder proposals at companies' annual spring proxy meetings has shifted from improving business performance and financial returns to advancing social or political causes such as climate change, gender diversity and company disclosure of political activities, some members of the coalition said in interviews.
The new advocacy and education coalition is made up of the National Association of Manufacturers, the Equity Dealers of America, the Savings & Retirement Foundation, the Small Business & Entrepreneurship Council and the American Council for Capital Formation. The effort will be led by George David Banks, a former top energy adviser to President Donald Trump.
The ESG movement is deterring smaller companies from going public, according to the coalition members. Moreover, they believe retail investors who have passed off management of their assets to big firms may not be fully aware that funds are using resources to advocate for what the coalition says are often politically, not financially, motivated actions on issues.
People generally assume that when they hand control of their passive investments over to an asset manager, those investments "are not going to be used to leverage some kind of political outcome or a crusade or holy war against successful U.S. companies," Banks said in an interview. "Once retail investors understand what's going on, I'm pretty confident that a lot of them will demand some say," said Banks, who now is working at the American Council for Capital Formation think tank as well as in a handful of other initiatives.
And the specter of having to deal with dozens of shareholder resolutions, as well as appeasing the demands of big financial institutions, can be daunting to CEOs of smaller companies that are considering whether to become publicly traded, the coalition members said. Adopting ESG measures is much easier for larger companies because they can absorb the cost and likely already have some measures in place, Chris Iacovella, CEO of Equity Dealers of America, said in an interview. Equity Dealers of America is a trade association for retail investors and middle market brokerage firms.
The new coalition initially expects to continue its members' ongoing efforts to issue papers and editorials voicing their concerns. But the group also anticipates pushing U.S. lawmakers and the U.S. Securities and Exchange Commission to discourage politically motivated shareholder activities, increase regulatory oversight, and make some bigger organizations, such as proxy advisory firms, disclose any conflicts of interest.
Members of the coalition said they do not oppose ESG proposals by individual activist investors. Rather, the coalition formed in reaction to the up-swell in pressure after some of the world's largest asset managers, including BlackRock Inc. and Vanguard Group Inc., joined the call for companies to adopt more socially and environmentally responsible policies in 2017. Experts have pointed to those events as the turning point in the climate disclosure push.
For its part, Vanguard said it does not engage with companies to further a political or social agenda but instead does so to uphold its fiduciary responsibilities and protect the value of its shareholders' investments.
"This client-centric approach allows us to have fruitful conversations with boards and management teams to ensure the companies are here for the long-term — a goal that benefits investors, company employees and management alike," Vanguard said in an emailed statement.
BlackRock in an emailed statement noted that it backed only two of 19 climate change resolutions in 2017. And, like Vanguard, BlackRock contends its actions are aimed at enhancing the long-term value of its client's assets, "not at implementing social values."
"How well a company is governed, including how it manages its material environmental and social risks, gives us insights into its ability to respond to changes in the business environment and the quality of the management team," BlackRock said.
The extent to which this coalition can move the needle is yet to be seen, but it will be going up against a movement that appears to be gaining ground with respect to getting companies to act.
Climate resolutions at several energy companies have garnered a majority of shareholder support in 2018, and a number of companies that were facing shareholder climate resolutions agreed to issue reports in exchange for shareholders pulling those proposals. Moreover, movements coordinated by Ceres and others such as the Climate Action 100+, which is backed by more than 200 global investors and targets the top 100 largest greenhouse gas emitters, are showing no signs of slowing.
A group of 60 large investors representing $10.4 trillion in assets wrote an open letter on May 18 that urged oil and gas companies to ramp up their climate change strategies and their efforts to reduce emissions.
Mindy Lubber, Ceres CEO and president, in an interview said shareholders are proposing resolutions on topics they believe are material to a company's performance and ability to remain competitive.
"If you are a company that's going to have to radically change to meet the Paris Agreement [on climate change], then investors ought to know about it," Lubber said. Without that analysis, "investors are left in the dark," she said.
But the coalition is hoping to find a receptive audience in the pro-business Trump administration. The SEC this proxy season has sided with companies over a number of environmental and social proposals. And the U.S. Department of Labor recently clarified that investment advisers to company employee retirement plans must put economic interests ahead of ESG factors in making investment decisions.