The Finger-Pointing at the Finance Firm TIAA – The New York Times

TIAA’s image as a benevolent provider of investment advice is in question. Several legal filings — including a lawsuit by TIAA employees with money under the company’s management, and a whistle-blower complaint by a group of former workers — say it pushes customers into products that do not add value and may not be suitable but that generate higher fees. Such practices would violate the legal standard that applies to retirement accounts and securities laws governing investment advisers.

And while TIAA contends that its operations are untainted by conflicts because its 855 financial advisers and consultants do not receive sales commissions, former employees, in interviews and in lawsuits, disagree. They say the company rewards its sales personnel with bonuses when they steer customers into more expensive in-house products and services.

In the New York Times, Gretchen Morgenson continues by describing a confidential whistleblower complaint that:

contends that TIAA began conducting a fraudulent scheme in 2011 to convert “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts” that were more costly. Advisers were pushed to sell proprietary mutual funds to clients as well, the complaint says. The more complex a product, the more an employee earned selling it.

‘No President in the U.S.’ Leads $53 Billion Fund to Sell Stocks – Bloomberg

A leadership vacuum in the world’s biggest economy has driven the largest private-sector pension fund in Finland to cut the weight of U.S. stocks in its 45 billion-euro ($53 billion) portfolio.

“It seems as if there is no president in the U.S.,” Risto Murto, chief executive officer of Varma Mutual Pension Insurance Co., said in an interview in Helsinki on Wednesday. “If I look at what is the moral and practical power, there is no longer a traditional president.”

Source: ‘No President in the U.S.’ Leads $53 Billion Fund to Sell Stocks – Bloomberg

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

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?”

Blackrock’s Larry Fink on What Investors Expect

In his recent annual letter to CEOs, Larry Fink once again put corporate leadership on notice that ownership is watching and will act, particularly in these turbulent times.  

Mr. Fink, the head of BlackRock,the world’s largest asset manager, reminded CEOs that just because investors are thinking long term does not mean that they have infinite patience. Investors are looking for corporate leadership in the boardroom and the C-suite to deploy assets for sustainable value creation, including investments in people, not just to goose short-term stock prices:

He writes,

“Companies have begun to devote greater attention to these issues of long-term sustainability, but despite increased rhetorical commitment, they have continued to engage in buybacks at a furious pace. In fact, for the 12 months ending in the third quarter of 2016, the value of dividends and buybacks by S&P 500 companies exceeded those companies’ operating profit. While we certainly support returning excess capital to shareholders, we believe companies must balance those practices with investment in future growth. Companies should engage in buybacks only when they are confident that the return on those buybacks will ultimately exceed the cost of capital and the long-term returns of investing in future growth.”

In addition to investing in worker training, Mr. Fink called on companies to step forward to provide new solutions to our troubled and inadequate retirement system;

“[A]s major participants in retirement programs in the U.S. and around the world, companies must lend their voice to developing a more secure retirement system for all workers, including the millions of workers at smaller companies who are not covered by employer-provided plans. The retirement crisis is not an intractable problem. We have a wealth of tools at our disposal: auto-enrollment and auto-escalation, pooled plans for small businesses, and potentially even a mandatory contribution model like Canada’s or Australia’s.

“Another essential ingredient will be improving employees’ understanding of how to prepare for retirement. As stewards of their employees’ retirement plans, companies must embrace the responsibility to build financial literacy in their workforce, especially because employees have assumed greater responsibility through the shift from traditional pensions to defined-contribution plans. Asset managers also have an important role in building financial literacy, but as an industry we have done a poor job to date. Now is the time to empower savers with new technologies and the education they need to make smart financial decisions. If we are going to solve the retirement crisis – and help workers adjust to a globalized world – businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security.”