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Climate Change Blog

Top Asset Managers That Support Environmental Shareholder Proposals

Environmental shareholder activism at publicly traded companies in the U.S. features some of the largest investors in the world supporting proposals sponsored by some of the smallest investors in the world. From 2015 to the present, most environmental shareholder proposals were brought to annual meetings of companies by relatively unknown investment groups such as As You Sow, Mercy Investment Services, The Park Foundation, Trillium Asset Management, Calvert Asset Management, The Unitarian Universalist Association of Congregations and the Presbyterian Church of the USA. Only occasionally have these proposals been co-sponsored or sponsored by significantly larger pension funds in the U.S. market known for their interests in corporate environmental policy. With these proposals, these small investors have commanded degrees of attention at corporations highly disproportionate to their usually miniscule ownership stakes. The 2017 proxy season is likely to bring continued increases in visibility for these investors, with added support from a few of the world’s leading asset managers.

How the Largest Asset Managers Have Voted on Environmental Issues

In 2016, As You Sow, a social impact investor based in Oakland, CA, brought an advisory proposal to the annual meeting of Chevron asking management to provide an annual report to shareholders regarding the company’s shale operations, policies regarding hydraulic fracturing, and its efforts to minimize the adverse impacts of hydraulic fracturing. Although the proposal failed to garner the requisite votes in favor to pass, it received a noticeable 30% of votes cast. The resolution’s most outspoken supporter in the shareholder base was another relatively small, environmentally-conscious shareholder, The Sisters of St. Francis of Philadelphia. Support for the resolution would not have reached 30%, however, without the “vote for” recommendation of the leading proxy advisory firm, Institutional Shareholder Services (ISS), and the actual votes of asset managers holding in excess of 5 million shares of the company’s stock. The resolution might have passed had a handful of top investors changed positions and offered their support.

Voting records for the 2017 proxy season will be more complete and ready to analyze in coming weeks. For now, voting records from annual shareholder meetings from July 2012 through June 2016 show that several of the world’s leading asset managers, as ranked by assets under management (“AUM”), commonly vote “for” environmental shareholder proposals. Among those are the following 17 asset managers which collectively hold approximately $11.66 trillion1 in AUM: State Street Corporation; Goldman Sachs Asset Management LP, JPMorgan Investment Management, Inc., Legal & General Investment Management, Northern Trust Investments, Norges Bank Investment Management, Deutsche Asset & Wealth Management, TIAA-CREF Asset Management LLC, Allianz Global Investors, AllianceBernstein LP, HSBC Global Asset Management, Morgan Stanley Investment Management, Inc., Aberdeen Asset Management, Inc., Principal Global Investors LLC, Hermes Equity Ownership Services, California Public Employees’ Retirement System (CalPERS) and RBC Global Asset Management, Inc.

Asset managers, as institutional investors, are nonbank entities that trade securities in sufficient dollar or share amounts to qualify for special treatment under U.S. and state law. Institutional investors benefit from a reduced regulatory burden in buying and selling stocks because the law presumes these investors are sophisticated buyers of securities and are better able to appreciate and protect themselves and their investor-clients from investment risk. This type of investors includes investment advisors, pension funds, mutual funds, endowments and insurance companies. Their fiduciary duties stem from, among other sources, the law of trusts and, in 43 U.S. states and Washington, D.C., the Uniform Prudent Investor Act. Since institutional investors invest substantially higher amounts of capital in the shares of public companies as compared to retail shareholders, the largest of such investors typically hold meaningful proportions of the outstanding stock in the companies in which they invest. This concentrated shareholding in individual companies means that institutional investors can influence voting outcomes at annual meetings more perceptibly, and determinedly, than individual retail shareholders who are unconnected and not organized.

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Calculation of assets under management is based on public disclosures by institutional investors in the last two years. As not all institutional investors are required to report on a routine basis, and given that assets under management may be calculated under various methods, these figures should be taken as very general approximations only.

In the sample period, these AUM-leading investors displayed a particular willingness to vote for environmental shareholder proposals in comparison to their peers. At the high end of the group is Boston-based State Street Corporation with an AUM of approximately $2.47 trillion, and at the lower end of the group (although still among the largest investment groups in the world) is Canada-based RBC Global Asset Management, Inc. with an AUM of approximately $293 billion. A notable player on the list near RBC is CalPERS, the largest pension fund in the U.S. CalPERS’ environmental investment agenda has been and will continue to be empowered by the voting strength of similarly-minded but even larger investment funds, among which are leading European pension funds and investment companies discussed below.

The tables that follow show voting patterns of these investors on five proposal types brought to shareholder meetings over the course of this sample period: proposals for companies to create reports on sustainability policies, climate change related policies and fracking activities; proposals related to reporting on industrial waste, pollution and greenhouse gas emissions; and proposals for companies to report on how they will be affected by measures limiting the global increase in temperature to 2° Celsius pursuant to the 2015 Paris Agreement.

In the sample period of July 1, 2012 to June 30 2016, 105 shareholder meetings featured a proposal to create a sustainability report. Deutsche Asset & Wealth Management voted “for” the proposal all but twice at the 45 shareholder meetings for companies facing this proposal in which it was a shareholder.

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Numbers in parentheses reflect number of times the proposal was voted on by the asset manager and its managed funds at a shareholder meeting of a public company domiciled in a U.S. state. “Split Votes” indicates that at least one fund (including only one of several funds) under management voted its shares “for” the resolution. Data is compiled from Proxy Insight.

70 meetings featured a proposal to create a report regarding industrial waste, pollution and/or greenhouse gas emissions. Deutsche Asset & Wealth Management again led this particular set of investors in votes “for” such a proposal.

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See caption above.

62 meetings featured a proposal to create a report regarding climate change, pollution or greenhouse gas emissions. HSBC Global Asset Management voted “for” the proposal at all but two of 38 shareholder meetings for the companies facing this proposal in which it holds shares.

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See caption above.

27 meetings featured a proposal to create a fracking report. Five of the surveyed institutional investors supported such a proposal at almost all meetings at which they voted on the proposal.

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See caption above.

13 meetings featured a proposal to create a report regarding the impact of the 2° Celsius scenario. The proposal has historically appeared at annual meetings less frequently than other proposals but has received by far the strongest and most consistent support from investors as compared to other environmental proposals.

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See caption above.

The investors most commonly voting “for” the suite of environmental proposals examined above were HSBC Global Asset Management, Deutsche Asset & Wealth Management, Northern Trust Investments and CalPERS. CalPERS’ commitment to environmental proposals is becoming well-known and any successes that it promotes at ballot boxes in 2017 will further that reputation. Less commonly explored has been the European presence at shareholder votes on environmental proposals.

A European, or Globalist, Approach?

Nine of the 17 major investors included in the sample data are asset managers and pension funds based in Europe or Canada. Legal & General Investment Management is the investment arm of London-based financial services, insurance and pension management company Legal & General plc. Norges Bank Investment Management is the investment management arm of the Government of Norway. Deutsche Asset Management is a subsidiary of Frankfurt-headquartered Deutsche Bank AG. Allianz Global Investors is a financial services company of Munich-based Allianz SE. Alliance Bernstein is a subsidiary of the French insurance conglomerate AXA S.A. HSBC Global Asset Management is a private asset management firm and subsidiary of London-headquartered HSBC Holdings plc. Aberdeen Asset Management is the global asset management subsidiary of Scotland-based Aberdeen Asset Management plc. Hermes Equity Ownership Services is the primary manager of the London-headquartered BT Pension Scheme. RBC Global Asset Management is a Toronto-based investment manager and an affiliate of the Royal Bank of Canada.

Asking why top-level non-U.S.-based investors are more likely to support environmental proposals than certain of their U.S.-based peers (who are not mentioned here) is an important question. It is commonly supposed that U.S.-based asset managers are constrained from placing financial resources at their disposal behind environmental concepts because their fiduciary duties are less likely to tolerate the non-economic considerations implied by environmentally-influenced investment decisions.1 But U.S. managers at least arguably have latitude in their fiduciary duties to factor environmental considerations into their investment decisions, and arguably not appreciably less than their European and Canadian counterparts. Moreover certain institutional investors may believe, rightly or wrongly, that the determination of how to vote at an annual meeting of a company is a material step removed from the decision of whether to invest in the company. Investing in a company on a theory informed by ESG criteria poses at least some legal risk to asset managers constrained by fiduciary duties, but investing in a company for classic investment thesis reasons and then voting at an annual meeting on a non-binding ESG proposition arguably poses far less risk. If the differences between European investors and their U.S. based peers are not explained fully by reference to the law, such differences may still also result from perceptions about law. Answers may also be looked for in other areas such as differing approaches to financial analysis and even culture. Cultural differences between investment managers can also exist, of course, between investment firms in the same country, and this clearly applies in the U.S. as well.

That a broader, globalist trend may be at work is seen in the operations of the UN-supported initiative known as Principles for Responsible Investment (PRI). The PRI is an international network of investors constituting over 1,700 signatories from 50 countries and representing US$62 trillion in assets.3 The PRI’s mission is to explore the investment implications of ESG considerations and to integrate these considerations into investment and stock ownership decisions. The PRI developed six voluntary and aspirational Principles of Responsible Investment, knowns as the “Principles,” which are (i) incorporating ESG issues into investment analysis and decision-making, (ii) incorporating ESG issues into ownership policies and practices, (iii) seeking appropriate disclosures on ESG issues by the entities in which signatories invest, (iv) promoting acceptance and implementation of the Principles within the investment industry, (v) working together to enhance signatories’ effectiveness in implementing the Principles and (vi) reporting on signatory activities and progress in the implementation of the Principles.

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Source: https://www.unpri.org/about/the-six-principles

According to a 2016 UN- and PRI-sponsored report, Fiduciary Duty in the 21st Century, the U.S. has just 227 PRI signatories. The report claimed that, on a global level, U.S. asset managers lagged behind their European peers in ESG integration in part because lawyers and consultants in the U.S. “tend to advise their clients that the law requires them to have exclusive focus on financial returns.”

If more leading institutional investors do not turn out in higher numbers for environmental proposals in the 2017 proxy season than they did in 2016—a prospect that at present seems unlikely—the reason may not necessarily be tied to traditionalist or environment-ambivalent outlooks in the investment firms; it may be that investment firms more likely to vote “against” than “for” these proposals are not compelled by the current state of environmental shareholder resolutions. These resolutions typically contradict the recommendations of corporate directors who are especially enabled to appreciate the pros and cons of such proposals for both the welfare of the corporations they manage and their shareholder constituencies. Major U.S. asset managers have historically tended to defer, with reason, to the judgment of sitting directors.

It may also matter to leading U.S. asset managers that environmental shareholder proposals typically originate with smaller shareholders. These smaller shareholders are generally heavy on social agenda but exponentially lighter than major institutional investors in terms of the responsibilities they bear to investors, the levels of ongoing engagement they have with the directors of issuers, and their in-house capacity to evaluate factors driving shareholder returns and ensuring sound operations of the companies in which they invest.

Not all shareholders that bring environmental proposals however are small in comparison to the institutional heavyweights. New York State Common Retirement Fund manages approximately $178.6 billionin assets and brought at least 13 environmental proposals to shareholder meetings between 2015 and 2017. Social investment funds with small asset pools can also form strategic relationships with larger investors. For example, the Transition Pathway Initiative is a coalition of investors including the Illinois-based Westpath Investment Management (General Board of Pension and Health Benefits of The United Methodist Church), the Church of England, England-based Aviva Investors, France-based BNP Paribas and France-based Hermes Equity Ownership Services. At the annual meeting of Chevron in 2016, referenced above, Westpath joined forces with Hermes in backing a 2° Celsius proposal that received 40.8% of the votes cast. This was one of the highest proportions of “for” votes received on an environmental proposal by any U.S.-traded corporation in 2016.

Will Changing Market Attitudes about ESG Tip the Scales in 2017 and Beyond?

For many years environmental shareholder proposals were discounted by corporations and corporate governance specialists as largely unsupported by the market of investors and as unhelpful to companies. Proposed legislation before the U.S. Congress would make it more difficult for shareholders to bring environmental proposals to annual meetings through the Rule 14a-8 process—based on the argument that such proposals are a distraction to companies, harm the market and are not greatly valued by investors. Historically, institutional investors and corporations have been wary of environmental proposals on the theory that backing shareholder-driven ESG initiatives jeopardizes their fiduciary duties to investors.

Yet the data above indicates that asset managers holding approximately $11.66 trillion in investor assets—as well as PRI signatories—do not see a problematic conflict between their voting preferences and the interests of their investors and other constituents. If more asset managers in the future affirmatively take the view that supporting environmental shareholder proposals is within the bounds of their fiduciary duties, then more investment managers may decide to support these proposals. Either way, an open question in environmental shareholder activism is to what extent voting decisions of top asset managers on environmental issues will be shaped in coming years by the changing environmental sensibilities of their clients, as well as of the investment analysts and managers on both buy and sell sides.

Voting trends suggest that publicly traded companies in the U.S. may continue to feel pressures from U.S.-based pension funds, European investors, and a growing number of significant U.S.-based asset managers to alter their environmental policies, or at least their disclosure policies, even at a time when U.S. domestic policy may be poised to loosen the regulatory restrictions on their businesses and shift away from a focus on international efforts to limit climate change, such as through the Paris Agreement.

* Leonard Wood is an associate attorney at Vinson & Elkins L.L.P. in Houston, Margaret Peloso is a counsel based in the firm’s Washington, DC office and Corinne Snow is an associate in the firm’s Houston and New York offices.

The calculation of assets under management is based on public disclosures by institutional investors in the last two years. As not all institutional investors are required to report on a routine basis, and given that assets under management may be calculated under various methods, these figures should be taken as very general approximations only.

2 See Robert G. Eccles & Mirta D. Kastrapeli, The Investing Enlightenment, at 7–8.

3 Principles for Responsible Investment. See https://www.unpri.org/about.

4 Office of the New York State Comptroller, NYS Common Retirement Fund. See http://www.osc.state.ny.us/pension.

5 Eccles & Kastrapeli, supra n. 2.

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Margaret E. Peloso

Margaret E. Peloso Partner