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ESG Assets Surging but at Risk

US SIF study documents environmental, social, and governance — ESG assets — under management surging. ESG assets now account for one in every four investment dollars. Demand for ESG asset focus is coming from real people.

In contrast, the Main Street Investors Coalition [funded by the National Association of Manufacturing (NAM)], insists on “maximizing performance ahead of pursuing social and political objectives.” If NAM gets its way, ESG assets will be cut to a trickle.

In a letter to the SEC ahead of an upcoming Staff Roundtable on the Proxy Process NAM writes,

Investment advisers should have policies and procedures in place that require the identification of a clear link to shareholder value creation before voting in favor of any proxy proposal, including those focused on ESG topics.

However, as you will read below, the public wants to move in a different direction. The public wants to invest in ESG assets – those geared toward not only making money but creating a better world.

The US SIF Foundation’s 2018 biennial Report on US Sustainable, Responsible and Impact Investing Trends, found that sustainable, responsible and impact investing, SRI assets, now account for $12.0 trillion—or one in four dollars—of the $46.6 trillion in total assets under professional management in the United States. This represents a 38 percent increase over 2016.

The Trends Report—first compiled in 1995—is the most comprehensive study of sustainable and impact investing in the United States. From the first report when assets totaled just $639 billion to today, the sustainable and responsible investing industry has grown 18-fold and has matured and expanded across numerous asset classes.

The 2018 report identified $11.6 trillion in ESG incorporation assets under management at the outset of 2018 held by 496 institutional investors, 365 money managers and 1,145 community investing financial institutions. The largest percentage of money managers cited client demand as their top motivation for pursuing ESG incorporation, while the largest number of institutional investors cited fulfilling mission and pursuing social benefit as their top motivations.

In addition, 165 institutional investors and 54 investment managers collectively controlling nearly $1.8 trillion in assets filed or co-filed shareholder resolutions on ESG issues between 2016 and the first half of 2018.

Eliminating double counting for assets involved in both ESG incorporation and filing shareholder resolutions produces the net total of $12.0 trillion in SRI strategies at the start of 2018.

Money managers and institutions are utilizing ESG criteria and shareholder engagement to address a plethora of issues including climate change, diversity, human rights, weapons and political spending,

said Lisa Woll, US SIF Foundation CEO.  Additionally, retail and high net worth individuals are increasingly utilizing this investment approach with $3 trillion in sustainable assets.

Ellen Dorsey, Executive Director of the Wallace Global Fund, a leading foundation endowment that has embraced sustainable investing and supported the Trends Report since 2010, noted,

We support this research as a critical tool to track crucial trends in the industry and benchmark our own goal of 100% mission alignment, as we promote an informed and engaged citizenry, help fight injustice and protect the diversity of nature.

According to Amy O’Brien, Global Head of Responsible Investing at Nuveen, the investment management division of TIAA:

What the US SIF Trends Report shows incontrovertibly, is that investors are truly beginning to understand the value of ESG considerations as an effective means of managing risk and improving investment performance. With an intensified focus on important issues such as climate change and corporate board gender diversity, we hope to see creative solutions that will help address these challenges, and in turn, drive shareholder value in the years ahead.

Top ESG Asset Criteria

The relative prominence of specific ESG criteria differed between money managers (firms that manage assets on behalf of others) and institutional asset owners (entities like pension funds, foundations and educational endowments that own and invest assets, often via money managers).

The report breaks out the top ESG issues by types of investment vehicles, including registered investment companies, such as mutual funds and exchange traded funds (ETFs), private equity and venture capital funds, community investing institutions and others.

The report also provides detail on the top ESG criteria by each of nine types of institutions: public funds, insurance companies, educational institutions, philanthropic foundations, labor funds, hospitals and healthcare plans, faith-based institutions, other nonprofits and family offices.

Asset managers:  Climate change was the most important specific ESG issue considered by money managers in asset-weighted terms; the assets to which this criterion applies more than doubled from 2016 to 2018 to $3.0 trillion. Other top ESG categories included tobacco, conflict risk, human rights, and transparency/anti-corruption. Concern among money managers and their clients about civilian firearms was also on the rise.

Asset owners:  For institutional asset owners, conflict risk was the top specific ESG criteria, up 8 percent from 2016 to $3.0 trillion followed by tobacco, carbon/climate change, board issues, and executive pay.

Investor Advocacy for ESG Issues

From 2016 through the first half of 2018, 165 institutional investors and 54 investment managers collectively controlling nearly $1.8 trillion in assets at the start of 2018 filed or co-filed shareholder resolutions on ESG issues. “Proxy access” was the leading issue raised in shareholder proposals, followed by disclosure and management of corporate political spending and lobbying.

The proportion of shareholder proposals on social and environmental issues that receive high levels of support has been trending upward. During the proxy seasons of 2012-2015, only three shareholder proposals on environmental and social issues that were opposed by management received majority support, while 18 such proposals received majority support in 2016 through 2018.

In addition, the number of survey respondents that reported engaging in dialogue with companies on ESG issues increased notably since 2016.

Other Findings

Both the number and assets under management of registered investment companies incorporating ESG continued to grow at a strong pace. Assets in mutual funds reached $2.6 trillion, up 34 percent over 2016, and the number of ETFs more than doubled from 25 to 69.

ESG assets under management in 780 alternative investment vehicles, including private equity and venture capital funds, hedge funds, and real estate investment trusts (REITs) or other property funds, totaled $588 billion at the start of 2018. This is nearly triple the assets identified in 2016, and an 89 percent increase in the number of funds.

With assets of $185.4 billion, the community investing sector, which includes community development banks, credit unions, loan and venture funds, has experienced rapid growth over the last decade, nearly doubling in assets between 2014 and 2016, and growing more than 50 percent from 2016 to 2018.

The National Association of Manufacturing claims to have formed the Main Street Investors Coalition to ensure the individual investor’s interests are considered. Yet, money is pouring into ESG assets because more and more individuals are investing their values.

That letter from NAM to the SEC also asks that proxy proposal resubmission levels be raised from 3% of the vote in year one, 6% after two years and 10% after three to new thresholds of 6%, 15% and 30% respectively. Additionally, “NAM supports increasing the existing $2,000 threshold to a level that more appropriately reflects true ‘skin in the game’ for a shareholder sponsoring a proposal.” At least one bill in Congress aims at setting that level at 1% of the total value of the company

In summary, at a time when the public is clamoring for ESG assets and shareholder proposals to address ESG issues, NAM is calling on the SEC to:

  • double or triple resubmission thresholds on proxy proposals,
  • eliminate most proposals through high thresholds required for initial submissions,
  • prohibit investor advisors from voting for shareholder proposal unless they have identified the proposal is clearly linked to “shareholder value creation.”

Can NAM stem the flood of ESG assets? The SEC was created to protect investors. NAM seems to be asking the SEC to protect corporate managers from investors.

   

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Gender Quotas in California Boardrooms May Pave Way for Diversity

By August 31, 2018, California could become the first state in the nation with gender quotas to mandate publicly held companies that base their operations in the state to have women on their boards. The legislation—SB 826—will require public companies headquartered in California to have a minimum of one female on its board of directors by December 31, 2019. That minimum will be raised to at least two female board members for companies with five directors or at least three female board members for companies with six or more directors by December 31, 2021. Continue Reading →

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Field Assistance Bulletin 2018-01: New Tone, Same ESG Analysis

Field Assistance Bulletin 2018-01

Field Assistance Bulletin 2018-01 issued by Trump administration. Recently, the Employee Benefits Security Administration (EBSA) within the Department of Labor (DoL) released Field Assistance Bulletin 2018-01 (link) relating to ESG (environment, social and governance) and shareholder rights for ERISA governed benefit plans. I set out some brief high-level analysis on the guidance below. Continue Reading →

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Investor Response to Chamber: Don’t Gut Rights

Investor Response to Chamber: Letter

Representatives of hundreds of investors with trillions of dollars in assets delivered a letter to the SEC on November 9, 2017, An Investor response to U.S. Chamber’s Proposal to Revise SEC Rule 14a-8 (report).

We noted with interest the November 1, 2017, guidance contained in Staff Legal Bulletin No. 14I. While we are reserving judgment about how the guidance may apply in practice, we are particularly pleased by Director Hinman’s accompanying statement that the guidance is not intended to “make things easier or harder for one side or the other, . . . [but] to improve the process.” We strongly support that goal and plan to actively monitor the SEC staff no-action process during the upcoming proxy season to determine whether the goal was achieved.

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SLB 14I (CF) – SRI Conference: 1st Impression

SLB 14I (CF): Issued During 28th Annual SRI Conference

The latest SEC Staff Legal Bulletin, SLB 14I (CF), was issued on November 1, while 800 attended the 28th Annual SRI Conference in San Diego. I was flipping though the agenda when I got an email from a Bloomberg reporter asking for feedback on SLB 14I, which will further discourage shareholders from submitting proposals, especially those focused on environmental and social issues. It is yet another move against the ability of shareholders to fight for a salubrious environment, while seeking a healthy return.

28th Annual SRI Conference

First, a brief few words about the SRI Conference (), then I will dive into SLB 14I. I should have been attending these conferences for 28 years but they did not seem focused enough on governance issues. Over the years, governance and engagement have become more of an issue for them, while environmental and social issues have become more important to me… a happy convergence. Continue Reading →

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CalPERS Election Rules: Comments

CalPERS Election RulesCalPERS election rules, an obscure topic for most. Although the board of administration of CalPERS is very powerful, interest in CalPERS election rules is low. When proposed rules were discussed at a recent public meeting, I was the only one to provide any feedback. I expect that when there is a public hearing on the CalPERS election rules, I will be the only one testifying. Like corporate governance, pension fund governance gets too little attention.

I have seen much worse proposals before. For example, when they attempted to use CalPERS election rules to muzzle critics (CalPERS muzzles critics: Ballot rules protect board, keep others in the dark). The newly proposed election rules are not of that variety. Still, they hint at a certain degree of arrogance by seeking to put the Board above the law.

The current rulemaking attempts to create flexibility in CalPERS election rules by allowing the board to create rules of general application without going through the legally required rulemaking process. Sound like a technicality? Maybe, but democracy depends on the rules and an open process. I’d love to hear your thoughts in the comment section below.

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Proxy Cards Must be Impartially Labeled

Proxy CardsProxy cards must be impartially labeled, according to the Securities and Exchange Commission (SEC). Rule 14a-4(a)(3) requires that proxies “identify clearly and impartially each separate matter intended to be acted upon.” (Guidance) Over and over again during the last twenty years I have written to the SEC asking them to enforce this rule on proxy cards, especially with regard to misleading or uninformative descriptions of shareholder proposals frequently provided on voter information forms (VIFs).

According to Broadridge “98% of all shares of U.S. public companies are held by institutions or retail brokerage accounts in “street name,” leaving just 2% registered through transfer agents.” (Registered Shareholders: How to Manage the Millennial Challenge) Everyone voting shares held in street names votes their ‘proxy’ using a VIF. Yesterday, the SEC finally issued clarification in the form of Questions and Answers of General Applicability: Section 301. Description under Rule 14a-4(a)(3) of Rule 14a-8 Shareholder Proposals. Should we be celebrating? Will the SEC guidance actually change behavior? Does it apply to VIFs or only to legal proxies? Who will enforce the rule? How?  Continue Reading →

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‘Substantial Implementation’ Will Backfire

Substantial Implementation Will Backfire

‘Substantial Implementation’ Defense for Proxy Access Lite Under (i)(10) Will Backfire for Corporate Boards

Substantial implementation, that’s the deception companies have been arguing in order to obtain ‘no-action’ relief under SEC Rule 14a-8(i)(10) after implementing proxy access ‘lite.’ Law firms have been touting recent no-action letters released on February 12, with more in March  2016. It looks like a clear win for entrenched managers and directors for implementing only proxy access lite. In reality, such deception will cost companies more in legal fees and will reduce board discretion, since shareholders will increasingly file binding bylaw resolutions to obtain the same robust proxy access promised under vacated Rule 14a-8(i)(10). Continue Reading →

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Comment: “Materiality,” File Reference No. 2015-300

Public Citizen circulates comment letter on materialityTake Action: Bartlett Naylor of Public Citizen sent me the following draft sign-on comment letter to FASB/SEC regarding their concept release to redefine “materiality” from information that “could” be important to investors to information that “would” be considered important. If you agree with us that regulators shouldn’t be reducing the volume information that “could” be material, please contact Mr. Naylor at [email protected]. Let him know you want to join in the comment letter. Include your contact details and how you want to be referenced. 

December 6, 2015

Mary Jo White/Chair
James Schnurr/Office of Chief Accountant
Securities and Exchange Commission Members
Financial Accounting Standards Board Continue Reading →

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TK Kerstetter Wrong on Board Disclosure

TK Kerstetter wrong on board disclosure proposal at the SEC. TK Kerstetter is the president and CEO of Board Member Inc. a privately held publishing, database, research, and conference company focused on corporate board issues and governance trends. Corporate Board Member is sent to all corporate directors of public companies on the NASDAQ, NYSE Euronext, and NYSE Amex stock exchanges. Usually, the publication contains excellent advice. A rare exception is Kerstetter’s Director Qualification Disclosure Will Prove Lame. (The Board Blog, 12/9/09) Continue Reading →

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CalPERS muzzles critics: Ballot rules protect board, keep others in the dark

CalPERS“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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