The direction of this year’s Davos talks point to a subtle yet material shift of responsibility for the environment from public to corporate spheres. The WEF has gone so far as to issue a manual on Climate Governance for Corporate Boards, suggesting that it is for boards to monitor and mitigate related risks. While the premise of this thinking is not without foundation, the process of monitoring of corporations’ environmental impact is far from clear.Whilst a plethora of environmental, social and governance (ESG) disclosure frameworks have sprung up, their outcomes are not comparable as companies develop and present metrics they consider relevant for investors. The probability that any two companies quantify and disclose their environmental impact information in a comparable format is about the same as having identical twins from different parents.
Most existing frameworks focus on the quality of ESG disclosure by listed companies which, in principle, should allow institutional investors to assess and, if need be penalize, “ESG negative” corporations. However, in the vacuum of clear metrics that companies in different sectors are required to disclose, government or investor action to monitor corporate environmental impact is challenging.Governments are increasingly delegating their responsibility for policy-making and monitoring of corporate environmental impact to large institutional investors many of which are boasting their growing ESG capabilities. However, institutional investors, are not subject to specific guidelines apart from stewardship codes which are vague and do not require much specific reporting on their action to protect the environment. In reality, little is known on how institutional investors vote in specific shareholder meetings, let alone how they vote on environmental resolutions. Only a few countries such as Chile actually require specific types of institutional investors to disclose their voting record publicly.
A recent report by the 5050 Climate Change Project revealed that in spite of a growing support for climate resolutions, approximately half of top asset managers opposed half of key positive climate-related proposals. The largest institutional investors such as Blackrock and Vanguard have the lowest levels of support for positive climate resolutions, whilst their backing is critical for climate positive proposals to get majority support….If governments are going to pass the responsibility for monitoring the world’s most precious resource to institutional investors, this oversight mechanism needs all 32 teeth and much more expertise than most investors currently have in house.
First, the work of the Financial Stability Board needs to result in a framework for corporate disclosure complete with industry-specific metrics that institutional investors can monitor. Based on such frameworks, governments may also choose to give fiscal breaks for environmentally conscious firms or conversely, impose higher taxes on companies with a higher than average negative environmental footprint.
Second, if institutional investors are expected to act as stewards of our environment—they too, should be required to report to the public and the regulators on their voting policy on specific resolutions and explain how their engagement has contributed to limiting environmental risks. Investors need to be provided with further incentives to assume this responsibility, through for instance, the allocation of public pension savings to specific asset managers with a positive track record.
Last but not least, for institutional investors to become more effective watchdogs of our environment, the concept of their fiduciary duty needs to be recalibrated such that they owe this duty not only to their actual investors but also to the future generations. This will effectively help them transition their mindset to the long-term perspective taken by Norges in Norway or Mubadala in the Emirates.
Source: Investing in the Environment