Despite the asset management industry’s big push to extoll the virtues of engagement on ESG issues, scepticism remains, particularly as the clock ticks on.
“Engagement with oil and gas companies on climate change has continued for years with little progress on emissions reduction to show for it,” Lindsey Stewart, director of investment stewardship research, Morningstar, wrote in ESG Clarity last week.
“This has prompted questions about whether it was ever realistic to believe that the sector is capable of a self-directed transition to net zero. Two years on…ExxonMobil – like practically all other oil and gas producers – remains focused on increasing fossil fuel production.”
Of course asset managers will tell you engagement takes time, and results can’t be measured in black and white terms over a short time horizon. Just getting a meeting with a company to discuss biodiversity was considered a win, I was told by a fund manager recently.
A key part of many asset managers’ engagement is their voting strategies, which take much less time to enact. But if we were to go off the headline findings from this year’s AGM season, we might be sceptical of the effectiveness of these too.
This year, fewer ESG proposals were supported than last year.
Analysis by Morningstar, the Principles for Responsible Investment (PRI) and Diligent Market Intelligence will all give you slightly different figures (2.4% of ESG proposals supported this year compared with 10.1% last year, according to the latter), but the overall trend in the findings is the same; support is down.
And even when proposals have passed, the PRI found companies aren’t really bothering to implement them. In a survey of investors earlier this year the PRI found they believed companies are only fully implementing 23% of proposals, and that 14% will only be partly implemented. In approximately a quarter of cases investors thought the proposal would not be addressed at all.
If we go beyond the headline stats, the picture might be more complex. For example, the type of ESG proposals being put forward has changed – from the ‘low-hanging fruit’ of 2022 to those of a more prescriptive nature this year. And firms don’t want to be telling management exactly what to do.
“The increase in proposals calling for target setting, financed emissions, and Scope 3 reporting have likely contributed toward proposals being deemed overly prescriptive and winning the support of fewer investors,” said Kilian Moote, managing director in the ESG advisory practice at Georgeson.
“ESG proposals in the energy sector [historically] tended to be broader and less specific.”
What then will the future of using proxy voting as part of an ESG engagement strategy hold? Will it return to it’s mainly ‘G’-focused origins? Assume a role of lesser importance? Target new areas of ESG scrutiny?
“There’s going to be a change of approach within the next year or so because I don’t think we can keep putting through the same resolutions just to see them get lower and lower in support year after year,” Stewart told me.
This will include giving clients a greater say in voting decisions, as BlackRock and Hargreaves Lansdown have done as well as fintech Tumelo.
As for how else it will adapt, it remains to be seen.