Economy and Society: Proposed legislation would further integrate ESG into retirement plans

ESG Developments This Week

In Washington, D.C.ESG developments this week

Proposed legislation would further integrate ESG into retirement plans 

On May 27, four House Democrats introduced legislation they argue is aimed at promoting ESG transparency. The bills, Sustainable Investment Policies Act and the Retirees Sustainable Investment Opportunities Act, would continue the House’s efforts to overturn regulations enacted in the waning days of the Trump administration. A press release from Congressman Andy Levin’s office summarizes their perspective on ESG, ERISA, and investing for retirement:

“Congressman Andy Levin (MI-09), member of the House Education & Labor Committee and member of the Subcommittee on Health, Employment, Labor, and Pensions, along with Congressman Brendan Boyle (PA-02), member of the House Ways and Means Committee, Congresswoman Cindy Axne (IA-03), member of the House Financial Services Committee, and Congressman Jesús “Chuy” García (IL-04), member of the House Financial Services Committee, today introduced two pieces of legislation to protect and increase sustainable investments. The Sustainable Investment Policies Act and the Retirees Sustainable Investment Opportunities Act together would give workers a bigger say in where they invest their retirement savings by requiring large asset managers and plan investors and fiduciaries to take into account and explain to beneficiaries how they consider environmental, social and corporate governance (ESG) factors when making investment decisions….

The Sustainable Investment Policies Act amends the Investment Advisers Act to promote transparency and disclosure by having large asset investment advisors file a Sustainable Investment Policy (SIP) with the U.S. Securities and Exchange Commission (SEC). The SIP must describe the factors advisors consider when making investment decisions. These factors must align with an ESG framework. The ESG framework that investment advisers must consider includes, but is not limited to, the following investment considerations:

–          Corporate political spending and decision-making;

–          Worker and collective bargaining rights;

–          Climate and other environmental risks;

–          Global human rights and diversity and inclusion practices; and

–          The plan’s engagement with entities into which it invests, including proxy voting practices.

The Retirees Sustainable Investment Opportunities Act empowers ERISA-regulated plans to adopt a Sustainable Investment Policy (SIP) that explains how the plan’s investments will address considerations like job creation, worker pay and benefits, human rights, climate change, and more. The bill also affirms that ERISA plans may invest plan assets in sustainable investments so long as it is in the plan beneficiary’s best financial interest. The investment must also not compromise anticipated risk-adjusted returns.”

On Wall Street and in the private sector

Exxon shaken by ESG activist proxy fight 

On May 26, Exxon held its annual general meeting, at which it announced the results of voting on its proxy statement voting and acknowledged that an activist hedge fund had won at least two board seats. The Wall Street Journal explained the results as follows:

“An activist investor won at least two seats on the board of Exxon Mobil Corp. XOM +1.24% , a historic defeat for the oil giant that will likely force it to alter its fossil-fuel focused strategy and more directly confront growing shareholder concerns about climate change.

Exxon said Wednesday a preliminary vote count showed shareholders backed two nominees of Engine No. 1, an upstart hedge fund owning a tiny fraction of the oil giant’s stock. The final vote was not tallied as of early Wednesday afternoon, and the final composition of the board was unclear. Exxon Chief Executive Darren Woods was also reelected to the board, the company said.

The vote culminated a pitched, monthslong battle to persuade Exxon shareholders that turned into one of the most expensive proxy fights ever….

The hedge fund called for Exxon to gradually diversify its investments to be ready for a world that will need fewer fossil fuels in coming decades. Exxon defended its strategy to expand drilling, saying demand for fuels and plastics will remain strong for years to come, and pointed to a new carbon capture and storage business unit as evidence it is taking climate change seriously….”

Notably, the victory for the activists was enabled by the passive investment giants, Vanguard, BlackRock, and State Street, who constitute Exxon’s three largest shareholders, collectively owning more than 20% of the stock. The Wall Street Journal provides further details:

“Many of the world’s biggest investment firms helped elect directors proposed by an upstart environmental-activist fund to Exxon Mobil Corp.’s XOM -0.32% board. While votes are still being counted, BlackRock Inc., BLK 0.07% State Street Corp. STT -0.01% and Vanguard Group have said publicly they wielded votes for investors in favor of at least two dissident directors….

The investors backing Engine No. 1 turned into a who’s who list of Wall Street.

BlackRock voted for three directors proposed by Engine No. 1 and expressed concerns with Exxon’s strategic direction and the impact on its financial performance in the long term.

Vanguard voted for two directors proposed by the activist.

At least some Fidelity funds voted for Engine No. 1 directors, according to people familiar with the matter. T. Rowe Price Group Inc. TROW 0.60% voted for three of the four dissident directors, the company said Thursday.”

In response, the independent financial research operation Seeking Alpha warned that market participants who favor de-carbonization may feel triumphant but may also wish to hold off on their celebrations. According to Seeking Alpha’s Michael Boyd, the historical patterns show that when investors push ESG on fossil fuel companies from the outside, the companies tend to struggle and to underperform the market. This, he argued in a May 28 piece, is a function of the fact that outside activists tend to be concerned, in his view, with punishing the companies rather than improving their behavior and performance:

“[W]hat I set out to do is track performance of oil and gas firms that have enacted climate change policies, with weighting towards how “extreme” those measures were….

What was the outcome? On a backtested basis to early 2019, there has been no outperformance garnered from oil companies that have implemented varying ESG initiatives compared to those who have. In fact, there is a mild correlation with negative performance since implementation for the vast majority of the dataset….

ESG investors that are pushing for these changes do not seem to be increasing inflows towards oil and gas companies that are implementing the very policies they push for. BP is, without a doubt, one of the leaders on shifting its business model to adapt to the mainstream climate change narrative; the same is true for Royal Dutch Shell even with all the handwringing going on in the Dutch court system. Yet both are dramatically under-owned by pension funds, endowments, and ESG-motivated hedge funds, especially in comparison to North American counterparts that score particularly poorly on the above. Even after ESG policy initiations, those ownership stakes have not improved materially either.

This is an unfortunate habit of the ESG movement….[I]t’s about “dealing a blow” to the industry rather than actually taking carbon out of the environment.”

Mid-cap matters

In an article published May 28, Nasdaq highlighted the mid-cap ESG ETF market, suggesting that investors’ usual focus on large-cap and small-cap businesses made mid-caps a very attractive place for ESG-advocates to put their money:

“While it’s often said that mid cap equities are overlooked relative to their large- and small-cap counterparts, there are dozens of these funds for investors to consider.

The concept that may be going overlooked, at least for now, is mid cap potential in the ESG arena. The American Century Mid Cap Growth Impact ETF (MID) brings both concepts under one roof.

MID, which debuted last July, is part of American Century’s suite of active non-transparent exchange traded funds, or ETFs that do not disclose their holdings on a daily basis. The fund benchmarks to the Russell 1000 Mid-Cap Growth Index.

MID’s management teams looks for “companies that align with the United Nations Sustainable Development Goals (SDGs) that generate or could generate social and environmental impact alongside a financial return,” according to American Century.…”

The article concludes, noting that “mid caps are often more domestically focused than large caps, levering stocks in the middle to economic recovery.” This suggests that mid-caps might appeal not just to investors seeking continued returns but also to those looking to have an impact on Environmental, Social, and Corporate Governance matters in the U.S. primarily.

In the spotlight

Moody’s study: Biodiversity of growing interest among ESG advocates

Last week, Moody’s ESG released the results of a study that attempted to quantify the perceived risks posed to biodiversity by large, publicly traded businesses and to assess companies’ efforts to mitigate the perceived loss of biodiversity. According to the report, biodiversity is a growing concern among ESG practitioners and policy-makers alike. Nevertheless, according to the study, many large businesses struggle to incorporate these concerns into their ESG practices. A summary published by noted the following:

“Thirty-eight percent of 5,300 large, publicly traded companies operate at least one facility causing loss of habitat and a risk to biodiversity, according to a study by Moody’s ESG Solutions of more than 2.1 million facilities worldwide using “high resolution remote sensing data.”

Moody’s ESG Solutions found in its study that efforts by companies to reduce harm to biodiversity often fall short of commitments they make in public disclosures. For example, 61% of heavy construction companies disclose commitments related to biodiversity but less than 10% received a “robust” or “advanced” score from Moody’s for implementation.

Moody’s flagged “urban sprawl” as a major threat to biodiversity in the U.S., singling out big-box retailers such as Dollar General that pursue a “pattern of growth that inspires more sprawl by developing low-density, single-story buildings on the outskirts of town, in vegetated, undeveloped land.”

Moody’s ESG concluded that biodiversity will become one more argument in favor of a dual-materiality standard for businesses.

Notable quotes

“It was precipitated by the ESG [environmental, social and governance] movement and this notion, which was exacerbated by Elon Musk, that there are some real environmental problems with the mining of bitcoin. A lot of institutional buying went on pause….

Elon probably got a few calls from institutions. I noticed that BlackRock is [Tesla]’s number three shareholder and Larry Fink is the CEO. He is focused on ESG and especially on climate change. I’m sure BlackRock registered some complaints and perhaps there are some very large holders in Europe who are extremely sensitive to this.”

Cathie Wood, ARK Investment Management, on the fall of Bitcoin over the last few weeks, in an interview with Nathaniel Whittemore on the CoinDesk Podcast Network, May 28, 2021.