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The ESG proxy war

It may have taken a full-blown pandemic to get us there, but the long-anticipated tipping point for ESG seems, finally, to have arrived.

Spurred on by a bout of coronavirus era soul-searching and some decent performance figures, investors have piled into ESG-friendly funds in 2020. Investment Association data shows that UK investors put a net £6.7bn into what it categorises as “responsible” open-ended funds in the first three quarters of the year alone.

ESG approaches have been paying off on a company level, too. Sustainability-focused Impax Asset Management (IPX) recently reported a breathtaking 24.8 per cent rise in assets under management in the final quarter of 2020, with the news helping to push the company’s market capitalisation past the £1bn mark. Liontrust Asset Management’s (LIO) presence in the ESG space has paid its own dividends. In the final three months of the year its sustainable investments range displaced the firm’s popular Economic Advantage offerings (including Liontrust Special Situations Fund (GB00BG0J268)) as the company’s biggest product range by assets under management.

This is all heartening news for ESG fans, whether they are investing in line with their world views or a sense of where the best returns might lie. But those who wish to run a portfolio that makes a difference should remember that, in some areas, the industry could inevitably still do better on their behalf. This extends beyond investing alone, to the world of proxy voting.

The extent of the problem is captured by a recent ShareAction report, Voting Matters 2020, which assesses how a sample of the largest fund management firms in Europe, the UK and globally used proxy votes on social and climate issues last year. The report suggests that not all fund firms are fully using their clout to push companies on such matters: one in six asset managers from the sample did not use their votes in at least 10 per cent of the resolutions where they could have had a say.

While 10 per cent may not seem like much, it can still matter. Sheer strength of feeling can be demonstrated by the backing for a particular resolution, while some votes may well be failing by a small margin because of a few holdouts. As ShareAction notes, even a relatively low vote in favour of positive change can make a difference, as with a 2019 resolution on lobbying from BHP Billiton’s (BHP) investors.

Importantly, standing apart from votes can deny a fund manager’s investors a voice. But some of the obstacles standing in the way of greater participation can be instructive. ShareAction notes that asset managers may hold back from voting if they are privately engaging with the company on such issues already. Other reasons not to vote include, bizarrely, a sense that a company is a leader on the ESG front even if its efforts are not good enough – such as an oil and gas business doing more on climate issues than its peers. Fund firms may also back away from a vote if they think the proposed changes are too difficult for a company to implement – demonstrating some lingering tensions between positive change and a sense of business fundamentals.

Like many problems in the ESG space, it is likely this lack of participation will lessen over time and the situation should improve. But it reminds us that, for the truly committed ESG investor, your due diligence should go well beyond a fund’s biggest holdings and touch on whether the asset manager itself walks the walk.