What Slate’s Money Podcast Missed About ESG/Impact Investing

It really hurts to do this because I have nothing but admiration for all these guys and they get huge bonus points for a completely hilarious title for this episode. But holy moly did they get it wrong. Here’s their description:

Felix Salmon, senior strategy officer at a political risk startup, Anna Szymanski, Slate Moneybox columnist Jordan Weissmann, and Julia Shin—vice president and managing director of Impact Investing at Enterprise Community Partners—discuss:

the disbanding of Trump’s CEO council

companies’ responsibilities to their shareholders

impact investing

Here’s what they missed, very, very briefly:

Perhaps they think that their audience is primarily made up of the tiny fraction of Americans who sit at home and make individual stock picks. That’s not very likely; they’re over at Motley Fool. Most individuals, as the people on this podcast know very well, invest via mutual funds and pension funds. The story they should be looking at, which they touch on very briefly, is the evolving role of large institutional investors, like Blackrock, in the area they call “impact investing” or ESG, and, just as important, the way that evolving role reflects a more sophisticated understanding of metrics and indicators that are just as quantifiable and just as important for evaluating risk and return as too-easily manipulated traditional metrics like EPS and PE ratios. Both of these points are absolutely fundamental, but most of this podcast skirts those issues by accepting outdated notions about trade-offs between financial gain and investing to warm the cockles of the heart.

I won’t reiterate the extensive writing we have done on those issues, which we will continue to explore even more extensively in the future, I’m sure. We hope some day Slate will, too.

Source: The CEO council disbanding, companies’ responsibilities to shareholders, and impact investing.

Vanguard seeks corporate disclosure on risks from climate change

Vanguard Group on Monday said it has urged companies to disclose how climate change could affect their business and asset valuations, reflecting how the environment has become a priority for the investment industry.

Under pressure from investors, Vanguard and other fund companies have pushed to pass several high-profile shareholder resolutions on climate risk at big energy firms like Exxon Mobil Corp and Occidental Petroleum Corp during the spring proxy season.Vanguard manages about $4 trillion and is often the top shareholder in big U.S. corporations through its massive index funds – giving it a major voice in setting corporate agendas.

Vanguard, the biggest U.S. mutual fund firm by assets, had not supported climate activists on similar measures. But Glenn Booraem, Vanguard’s investment stewardship officer, said in a telephone interview on Monday the issue as well as shareholder proposals have evolved.

Source: Vanguard seeks corporate disclosure on risks from climate change

Campaign urges U.S. public pension funds to divest from owner of Trump hotel

Advocacy groups launched petitions and sent letters on Wednesday urging two of the biggest U.S. public pension funds to divest from an investment fund unless it stops paying one of President Donald Trump’s companies to run a New York hotel.<P><P>Reuters reported on April 26 that public pension funds in at least seven U.S. states periodically send millions of dollars to an investment fund that owns the upscale Trump SoHo Hotel and Condominium in New York City and pays a Trump company to run it, according to a Reuters review of public records.

Source: Campaign urges U.S. public pension funds to divest from owner of Trump hotel

World’s biggest pension fund goes gender equal for the WIN – Financial News

Japan’s $1.2tn Government Pension Investment Fund is forging ahead with its gender equality drive, picking MSCI’s “Empowering Women” WIN index to benchmark its progress.

The giant fund has begun by shifting about 3% of its passive domestic equity investments, or around one trillion Japanese yen ($8.8bn), into index funds tracking three socially-responsible benchmarks, it said today.

One of these, MSCI’s Japan WIN index tracks companies that “encourage more women to enter or return to the workforce”. It ranks companies according to the gender balance of their new recruits, current workforce, senior management and executive board.

The other two indices it picked today – MSCI’s Environmental, Social and Governance Select Leaders and the FTSE Blossom Japan index – track Japanese firms that perform well on a more general social-responsibility agenda.

Source: World’s biggest pension fund goes gender equal for the WIN – Financial News

Wall Street investors throw their weight in corporate votes – The Globe and Mail

Big investors are losing patience with unresponsive corporate directors, and they’re showing it with their votes.Shareholders have withheld 20 per cent or more of their votes for 102 directors at S&P 500 companies so far this year, the most in seven years, according to ISS Corporate Solutions, a consulting firm specializing in corporate governance. While largely symbolic, the votes at companies such as Wells Fargo & Co. and Exxon Mobil Corp. are recognized as signals of displeasure and put pressure on boards to engage.

“Institutional investors are becoming more actively involved in communicating displeasure through their votes,” said Peter Kimball, head of advisory and client services at the consulting firm, a unit of Institutional Shareholder Services. “Voting against directors at large-cap S&P 500 companies is a way for an institution to send a signal to other, smaller companies about the actions that they don’t like. That feedback trickles down.”

While the Trump administration moves to reduce regulatory pressure on companies, big institutional investors are moving in the opposite direction. State Street Global Advisors and BlackRock Inc., for example, are increasingly taking an activist approach, calling for changes in diversity and corporate responsibility.

“Part of this is really the shift in investors to focus more on board quality,” said Rakhi Kumar, who leads environmental, social and governance investment strategy at State Street. “Board responsiveness is a key reason why shareholders will hold directors responsible. If engagement isn’t working and boards aren’t being responsive to our feedback, then we take action.”

State Street voted against 731 directors in 2016 and expects a similar number this year, after rejecting 538 in 2015, Ms. Kumar said. No longer are investors just “checking a box” to support directors, she said. State Street is encouraging companies to refresh their boards to get new and more diverse members. (emphasis added)

Source: Wall Street investors throw their weight in corporate votes – The Globe and Mail

BlackRock, Vanguard and State Street bulk up governance staff

BlackRock, Vanguard and State Street have expanded their corporate governance teams significantly in response to growing pressure from policymakers and clients to demonstrate they are policing the companies they invest in.The move by the world’s three largest asset managers, which together control nearly $11tn of assets, will help address fears that investors are not doing enough to monitor controversial issues around executive pay and board diversity at the companies they invest in.

Source: BlackRock, Vanguard and State Street bulk up governance staff

Are Fund Managers Pushing Back on CEO Pay?

Financial Times notes:

[T]here are tangible signs that a growing number of investors are taking action to rein in excessive pay for company bosses. The consensus is that pressure from the public, politicians and clients have combined to put pressure on the investment industry to prove it is willing to push back on egregious pay packages.

Graeme Griffiths, a director at Principles for Responsible Investment, a UN­backed organisation whose members oversee a collective $62tn of assets, says: “Society is calling on fund managers to be more engaged. The public is now more aware of [wealth inequalities] than they were before.

“There has been a lot of academic research, news coverage and changes in the political landscape that have increased scrutiny of the differentials between those in well [paid] positions in the corporate arena versus those in more typical jobs. [Asset managers] are certainly partly responsible for this divergence over a long period of time.”

BlackRock, which was urged to toughen its voting approachurged to toughen its voting approach after approving 97 per cent of US pay resolutions in the 12 months to the end of June 2015, this year urged the CEOs of the UK’s largest companies to ensure salary increases for executives did not outpace those for average workers.

The world’s largest asset manager was also slightly less lenient on pay in the US last year, approving 96 per cent of remuneration reports in the 12 months to the end of June 2016, according to figures compiled for the FT by Proxy Insight, the data provider.

BlackRock chief executive Larry Fink additionally wroteLarry Fink additionally wrote to the heads of large global companies this year warning them that BlackRock would not “hesitate to exercise our right to vote against . . . misaligned executive compensation”.

50/50 Climate Project Shows Conflicts Skew Proxy Voting Decisions

Ross Kerber reports at Reuters:

Several big fund firms supported challenges on executive pay or climate disclosures less frequently where they had business ties to energy companies and utilities, according to a new study released on Tuesday.

The scrutiny of firms including Vanguard Group and Invesco Ltd is the latest research to raise questions about how well they manage potential conflicts of interest when casting proxy votes at the same time they are trying to win work like running corporate retirement plans….For its study 50/50 reviewed how fund firms voted on 27 proxy questions last year at oil and gas companies and utilities, tracking how often they voted against management recommendations.

At Vanguard, for instance, 50/50 found the $4 trillion Pennsylvania index fund manager broke from management 22 percent of the time. But at four companies where Vanguard serviced retirement plans, its funds did not support any challenges….Another fund firm, Invesco, broke with management 12 percent of the time, and at none of seven companies where it had business ties.

Kerber’s article includes more information and responses from the managers included, denying that the votes are influenced by conflicts. The full report is on the 50/50 website.

[T]he 50/50 Climate Project found that the managers who tended to vote in favor of management received more in fees and stewarded more assets than all other managers combined, and that their voting practices were even more management friendly at companies with which they had business relationships.

Report from the CII Winter meeting: ESG

ESG stands for what used to be termed “non-financial” metrics: environment, social concerns like diversity and treatment of employees, and corporate governance issues like CEO pay and board independence. Institutional investors, skeptical of traditional financial measures following the Enron/WorldCom era scandals, the dot.com bubble, and the financial meltdown, are increasingly relying on non-traditional measures to help them evaluate risk and return in their portfolio investments. Wall Street securities analysts may fixate on quarterly returns, but large institutional investors investing pension money are concerned about the long term, and they understand how misleading the traditional metrics, based on accounting principles developed in the 19th century, can be.

One of the opening sessions featured an interview with Hiromichi Mizuno, head of Japan’s $1.3 trillion government pension fund, who supervised the transition of the fund from all-Japanese investments to deployment of half of its capital in stocks around the world. “Through that process, I came to realize that the best way to improve our performance was to focus on stewardship in investing,” he said. He was inspired by a meeting with former UN Secretary General Kofi Annan, who asked him “why Japan was so indifferent on environment and social issues. I thought Japan was the most environmentally friendly and inclusive country, but we had never stepped up internationally.”

Mizuno told the group that they have a 100-year sustainable investment scheme with a 25-year investment horizon. They are “the textbook definition of a universal owner” with near-permanent holdings in just about every publicly traded company. Investment restrictions and transaction costs make selling out of any individual stock impossible, so the only alternative is engagement with corporate managers to make sure their strategy is sustainable over the long term.

Mizuno “expects best in class stewardship from our asset managers,” which means they will reduce their business with those who fall short and are willing to pay more for managers who can show they effective exercise of ownership rights like proxy voting and communication with executives and directors. Regardless of any short-term adjustments a particular government may make to the rules around climate change, Mizuno’s fund will ask whether the business model is sustainable, not over the course of one administration but over the next 25 years.

The panel on “Next Generation Investing” echoed this focus on sustainability. State Street Global Advisors’ Chris McKnett told the group that “there are risks and opportunities that can be overlooked by confining yourself to traditional analysis.” And one of those opportunities is appealing to the millennials who will control as much as $7 trillion in investable capital in the next five years. The “client careabouts” they have identified for that group include a strong interest in sustainability. As Morgan Stanley’s Thomas Kamei put it, “I’m already voting my dollars as a consumer. Why wouldn’t I want to invest that way as well?” The information he wants to see on sustainability will connect it to tax consequences and free cash flow.

Another panel examined the push for better financial disclosures on climate impact and sustainability, including guidelines and proposals from GRI, IFRS, SASB, and TCFD, which are filling in the gaps left by GAAP. “Climate has become a systemic risk,” said Paul Lee of Aberdeen Asset Management. The panel agreed that they want to see climate risk reflected in financial statements, whether the business is direct, as with fossil fuels and beachfront property, or indirect, as with the banks and insurance companies that do business with the enterprises with a more central connection to climate issues. Fortunately, the sustainability reports are less often being written by the marketing department, and becoming the province of the same people who are responsible for other financial reports.

Anne Simpson, the highly influential representative of CalPERS, said, “The financial case around risk is powerful….And this is what the economy needs. Sustainable businesses create jobs and growth.” She noted that Exxon responded to her fund’s shareholder initiative by adding an atmospheric scientist to its board for the first time. Simpson appreciates the Paris accords as a roadmap for investors and companies, no matter what happens in the US. “We’re not changing course because one country is doing certain things,” said Neil Hawkins, Dow Chemical’s Chief Sustainability Officer. Like the CFA Institute’s Rebecca Fender, who called this movement “a slow-moving but unstoppable train,” the CII members consider climate change a material investment risk and opportunity that they must understand and respond to.

Large institutional investors are permanent owners of stock, many of them through index funds that track the market as a whole. That means their only opportunity for protecting and enhancing returns is by pushing the management and boards of those companies to do better over the long term. “We own the best stock and the worst stock,” said McKnett. “Why wouldn’t we want to make the worst stock a little less worst?”

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel? New Webinar and Report from As You Sow

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at The Wheel? from As You Sow on Vimeo.

From the report, which can be downloaded here:

According to the Economic Policy Institute, “CEO pay grew an astounding 943% over the past 37 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay.”

For the past two years we have highlighted the 100 most overpaid CEOs of S&P 500 companies, and the votes of large shareholders, including mutual funds and pension funds on their pay packages.

What has changed since the first report? Not much. Executive pay has continued to increase. Although mutual funds and pension funds are doing better at exercising their fiduciary responsibility by more frequently voting their proxies against some of the most outrageous CEO pay packages. Of the mutual funds with the largest changes in voting habits from last year, all of them opposed more of the pay packages than they had the prior year.

As we noted in our prior reports, the system in place to govern corporations has failed in the area of executive compensation. Like all the best governance systems, corporate governance relies on a balance of power. That system envisions directors representing shareholders and guarding the company’s assets from waste. It also envisions shareholders

This governance system comes from a time when it was assumed that unhappy investors would simply sell their stakes if sufficiently dissatisfied with the governance of a company. It reflects a time when there were fewer intermediaries between beneficial holders and corporate executives. However, today more and more investors own shares through mutual funds, often investing in S&P 500 index funds. Individual investors are not in a position to sell their stakes in a specific company. The funds themselves are subject to a number of conflicts of interest and to what economists refer to with the oxymoronic-sounding term “rational apathy,” to reflect the expense of oversight in comparison to a pro rata share of any benefits.

The pay packages analyzed in this report belong to the CEOs of companies that the majority of retirement funds are invested in.

Today, those casting the votes on the behalf of shareholders frequently do not represent the shareholders’ interests.

CEO compensation as it is currently structured does not work; rather than incentivize sustainable company growth, compensation plans increase disproportionately by every measure. Too often CEOs are rewarded for mergers and acquisitions instead of improving company performance. As noted in the Financial Crisis Inquiry Report, “Those [compensation] systems encouraged the big bet – where the payoff on the upside could be huge and the downside [for the individual executive] limited. This was the case up and down the line – from the corporate boardroom to the mortgage broker on the street.”2 We note that the downside, which could include such features as environmental costs, may be limited for the individual, and instead borne by the larger society.

Paying one individual EXCESSIVE amounts of money can lead people to make the false assumption that such compensation is justified and earned. It undermines essential premises of capitalism: the robust ‘invisible hand’ of the market as well as the confidence of those who entrust capital to third parties. Confusing disclosure coupled with inappropriate comparisons are then used to justify similar packages elsewhere. These systems perpetuate and exaggerate the destabilizing effects of income inequality, and may contribute to the stagnating pay of frontline employees.

As the report is now in its third year, we have the ability to look back and see what happened to the companies identified in our report two years ago. We’ve been saying the most overpaid CEOs under-deliver for shareholders. In examining this data from the following two years of our report, we have found dramatic results— not only does the group of 100 most overpaid CEO companies of the S&P 500 underperform the S&P 500 by 2.9 percentage points, but the firms with the 10 most overpaid CEOs underperformed the S&P 500 index by an amazing 10.5 percentage points and actually had a negative return, reducing the actual value of the companies’ shares by 5.7 percent. In summary, the firms with the most overpaid CEO’s devastated shareholder value since our first report published in February 2015.

Identifying the 100 most overpaid CEOs in the S&P 500 was our purpose in writing this report. In undertaking this project we focused not just on absolute dollars, but also on the practices we believe to have contributed to bloated compensation packages.

Shareholders now supposedly have the right, since the enactment of the Dodd-Frank financial reform act, to cast an advisory vote on compensation packages. However, in today’s world, most shareholders have their shares held and voted by a financial intermediary. This means that this critical responsibility is in the hands of a fiduciary at a mutual fund, an ETF, a pension fund, a financial manager, or people whose full time job is to analyze the activities of the companies they invest in and monitor the performance of their boards, their CEOs, and their compensation.

A key element of the report has been to analyze how mutual funds and pension funds voted on these pay packages. This year we vastly expanded the list of funds we looked at. In response to excessive and problematic CEO pay packages, it should be noted that every fund manager has the power to vote against these compensation plans and withhold votes for the members of the board’s compensation committee who created and approved them. In some cases, institutional investors should request meetings with members of the compensation committees to express their concerns. Institutional investors should be prepared to explain their votes on executive pay to their customers, and individuals should hold their mutual funds accountable for such decisions by expressing their displeasure directly to those that are also well compensated to protect and represent them.