"I don't use the word ESG any more, because it's been entirely weaponised ... by the far left and weaponised by the far right," Larry Fink CEO Blackrock
Our view - Unless you have been living off grid, you will know that one of the defining debates around ESG and Sustainability relates to engagement - by which we mean interacting with companies to get them to change their behaviour.
This has often been defined in terms of fiduciary duty. Should asset managers only care about delivering the 'best' financial return for their investors/clients, or should their role be wider (and if so how much wider)?
Many people argue that asset managers, such as say Blackrock, should be engaging with the companies that they are invested in on a broad range of Environmental, Social and Governance issues. But a key question that remains largely unanswered in this debate so far is how does the asset manager decide what topics to engage on, and how do they decide what changes they want to see happen? The answer is not as obvious as it might seem.
We don't think it's for the asset manager alone to decide this. This is something that their clients, the asset owners and the individual savers in the investment value chain chart below, should also be heavily involved with. We need to find a way that this can happen, so that the choices and tradeoffs implicit in sustainable investing are well understood upfront. This goes beyond voting.
One final point before digging down into this topic - there is absolutely nothing in this debate that impacts the ability of asset managers to offer sustainable products to their clients. Or to make engagement on specific issues part of their mandate. This is simply about the best way to deal with issues that have both financial and societal dimensions.
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Who decides the topics for corporate engagement?
This week's Sunday brunch is a bit denser than normal. Sorry about that - but we think this is an issue that is worth exploring.
We are often told by investing professionals that the answer to the engagement question is that asset managers should work with companies on any topic that 'can impact the financial value of the company'. But what does this mean, and where do we draw the line? Does it mean that asset managers shouldn't engage on societal values related questions?
Surely many societal issues can also impact financial value - even if it's only in the longer term.
This is not as clear cut as you might first think.
I recently watched an interesting interview that Tom Gosling did for the European Corporate Governance Institute (yes, it's an exciting life we lead). He spoke with Professor Jill Fisch from the University of Pennsylvania Law School. The interview got deeply into the detail of corporate governance and engagement.
At its heart there is a simple point.