Investors Drive Corporate Behavior
Investors are Needed to Lead on Sustainability
When considering problems such as climate change, income inequality, slavery in the supply chain and more across environmental, social and governance (ESG) risks, investors need to take the lead to ensure corporations do what they should.
The reasons for this are many.
First of all, investors are in effect the owners of the companies in question, and the larger these companies get, the more spread out this ownership is.
The ownership patterns are very consistent, and as follows: no one person owns over 1% of the company's shares, and insiders in general typically own less than 5% total of large public companies.
Instead, US institutional investors such as Fidelity, Vanguard, BlackRock and State Street among other large fund managers typically own about half the stock. European and other non-European pension funds and other institutions own between 5-10%, and the rest is owned by individual investors, mostly by older folks who sit on the same portfolios year after year.
This last point explains why large banks such as Bank of America Merrill Lynch, Morgan Stanley and Goldman Sachs are building up teams seeking to provide Sustainable Investing solutions, as they are anticipating the rise of millennials inheriting these funds over the next generation, and given mistrust of large banks on the back of the Global Financial Crisis of 2008, they see the need to act at last on issues of sustainability concern and opportunity.
This is all music to our ears - let the top down, bottom up competition among investors begin to see who can provide the best services.
But none of this is enough to change corporate behavior, and here lies the rub. For all the interest in Impact Investing, that area remains a drop in the bucket of assets being managed.
Until small Impact designed projects and portfolios can be scaled by a factor of 100 or more, such efforts are in the margin of error of business at large, meaning all the effort has had minimal impact, not what the designers of such strategies certainly had in mind.
Also, when you look at what has motivated the largest companies to move towards solutions to sustainability challenges it has been for the following reasons:
1) An internal champion such as Unilever's Paul Polman comes to understand the sustainability challenges we are facing on environmental and social issues and takes it on. You have seen the same with the late Ray Anderson of Interface and Yvon Chouinard at Patagonia. In Unilever's case,their Sustainable Living Plan is seen as the most ambitious of any company. Yet if you listen in on the quarterly analyst calls of the company, no one asks about this. Rather it is about quarterly returns and did the company achieve its financial goals. This is why Polman stopped wanting to give quarterly guidance. His sustainability plans are arguably transformative, seeking to double growth while halving the company's footprint by 2020 and quarterly financial returns could easily get in the way of that success.
Unilever moves without investor pressure but what about companies without champions?
2) Then there are efforts to get investors to divest from fossil fuels. We have written here at length on why we feel this is misguided. The coal sector is in collapse, but only because of the rise of natural gas as a replacement fuel. Selling your coal shares would have made sense years ago, which would have saved investors who held on quite a bit of money. Certainly the same was true for other dying industries such as newspapers. This has nothing to do with one's values, rather recognizing a trend and getting out of the way of a sector that is imploding for economic reasons.
Global pressure on local pollution and growing climate change concerns will likely ensure that coal companies do not recover financially.
Oil companies are under pressure too now, especially given the low price of oil due to Saudi Arabia flooding the market, and both Iran and Iraq coming up as producing nations who can access global markets again.
So what should investors do?
3) Investors need to dig into the complexities of companies in all sectors, not just oil, coal and consumer goods, and encourage companies to do the right things for future returns.
Nelson Peltz and his activist push on Dupont is exactly the opposite of what is needed. Companies need to be well run and providing future needed solutions, not spun off into privately managed, outsourced entities whose returns go into a few private wealthy investors hands.
Rather, we need mutual funds, pension funds, foundations and endowments to rally together to ensure that the global economy functions for its beneficiaries and the public at large. Creating jobs and economic conditions which allow these same companies to thrive. Companies need healthy global economies or their returns will suffer. It's a positive dynamic which can only come from seeking solutions to society's biggest problems and these challenges are systemic in nature.
Given that ownership is also systemic, we, therefore, need a majority of investors to act in concert for what's best for us all.
The Principles for Responsible Investment (PRI) is the main place making this happen these days.
Representing $59 Trillion of assets, this investor collaboration seeks to reduce carbon emissions in the economy with intentionality.
It is hard to do this well, and you need to consider all asset classes especially Fixed Income (worth $100 Trillion, the largest asset class of all) and Infrastructure (expected to grow by $25-50 Trillion over the next 20+ years).
Current companies are also a key focus, and investors here can ensure that the right strategies are implemented, the wrong ones are stopped all with the future in mind.
There is a lot of important work to do, but a majority of investors need to come together to ensure that companies do the right thing.