End of Week Notes
SEC stands athwart history, yelling stop, but stakeholder capitalism is adding value during pandemic
We are in the midst of a major transition toward sustainable investing and stakeholder capitalism that may prove to be a full-on paradigm shift. But anytime that happens, the practitioners of the old ways of doing things don’t go down without a fight. They have a vested interest in the status quo because it was within that system that they created their power and wealth. The last place they want to go is into uncharted territory.
Interestingly, two groups that we might expect to be at the forefront of the resistance — investors and public companies — don’t seem to be on the front lines fighting change. Investors at all levels are coming to understand that excessive risk-taking, short-term thinking, and shareholder primacy, made possible by financial industry deregulation, caused the financial crisis, is worsening the climate crisis, and with its focus on capital at the expense of labor, has worsened inequality and, as a result of that, the current pandemic.
Nearly every asset manager of any significance in the world today has a sustainable-investing initiative in motion. The largest of them all, BlackRock, sees sustainability as fundamentally reshaping finance. The firm announced this year that it is putting sustainability at the center of how it invests.
I don’t know of a single asset manager who is actively resisting the move to sustainable investing. Some may be more committed than others. Some may be in “grin and bear it” mode, preferring the old paradigm but not wanting to stand against the winds of change. But none are out front leading the charge against it.
Similarly, among public companies, I know there are plenty of boards and managements that are tied to the old system, particularly in the fossil-fuel industry. And while the Business Roundtable statement on stakeholder capitalism was signed by 181 corporate CEOs, the shift will be, no doubt, frustratingly slow for many. On the other hand, companies like Microsoft, Starbucks and Unilever seem to be at the forefront. Danone announced this week it wants to be certified as a B Corp by 2025, which means it will legally commit to balancing the interests of stakeholders and shareholders.
Hearing no great outcry from investors or public companies, where is the resistance to sustainable investing and stakeholder capitalism coming from?
The D.C. Swamp. It’s coming from the conservative business trade organizations operating in Washington, D.C. and the various political appointees in government positions that come out of the same network, like the current Republican SEC commissioners. All undergirded by longtime financial support for mostly Republican politicians.
In the case of the SEC, we have the most-partisan commission in memory leading the resistance by trying to limit the ability of proxy advisors to serve their clients and of shareholders to engage with public companies via the proxy process. In neither case are investors or public companies (other than fossil-fuel companies) clamoring for these limitations. Comments from investors on the SEC’s proposed rules were overwhelmingly in opposition, whether from large or small investors, asset owners or asset managers. And very few public companies commented one way or another.
But the three Republican-appointed SEC commissioners listen to entrenched Washington, D.C. business trade organizations like the U.S. Chamber of Commerce, National Association of Manufacturers, and the aforementioned Business Roundtable, which seems to want to pay lip-service to stakeholder capitalism while fighting for the status quo. Even the D.C.-based Investment Company Institute sent a comment letter in support of the SEC’s proposals.
Their argument is that a small group of ESG investors, including the two dominant proxy advisory firms, is foisting a political agenda on public companies through the proxy process, forcing costly changes that hurt investor returns. The evidence? Increased investor pressure on companies to report on climate-related risks and growing investor support for climate-related shareholder resolutions and, in some cases, opposition to boards that refuse to take appropriate action on climate.
They have it all backwards, perhaps because they’re not investors; they’re mostly lawyers and ideologues who have spent their entire careers promoting conservative causes and fossil-fuel interests inside the Beltway.
Investors need to know how a company is addressing climate risk to assess the long-term risk of owning it. In other areas, like human capital management, product governance and customer relations, investors want greater transparency because in this age of the internet and social media, missteps in these areas can cause major reputational damage that can harm the business and investor returns.
What the ideologues don’t like is the implications of sustainable investing and stakeholder capitalism for broader change. They worry that the outcomes will be too progressive. They’ve spent years investing in wiring the system in Washington, D.C. against the changes that the new paradigm is trying to usher in.
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Here’s an inside-Washington take on the SEC’s proposed rules:
And here are the dismissive comments made this week by one of the Republican SEC commissioners about recommendations on ESG disclosure from the SEC Investor Advisory Committee:
A new SEC disclosure framework for ESG information, however, seems an unnecessary response when our existing securities disclosure framework is very good at handling all types of material information.
In its ESG disclosure recommendations, the committee noted that other markets are requiring ESG disclosures, citing China as one example in a footnote, prompting this from Commissioner Hester Peirce:
This embrace of the Chinese regulatory framework as a model for our own is interesting in light of the current debate about the reliability of financial statements produced by issuers governed by the Chinese regulatory framework. Of course, it is possible that a less transparent and less consistently applied regulatory system than our own is a better match for the ambiguity that characterizes ESG.
Update: Research on ESG performance during the pandemic
Meanwhile, more evidence of companies with stronger ESG credentials showing greater resilience amidst the current pandemic. George Serefeim and associates released an expanded version of their earlier research, which now covers a global sample of 3,078 companies, concluding with this:
Our results provide support to the idea that during a market collapse firms that respond with a focus on stakeholders outperform their competitors.
And BlackRock released a report this week showing that “companies with a record of good customer relations or robust corporate culture are demonstrating resilient financial performance” during the pandemic. The report concluded that energy underweights were responsible for only a fraction of ESG fund outperformance:
We believe that the outperformance has instead been driven by a range of material sustainability characteristics, including job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board.
My sentiments exactly. It’s worth a read.
Happy Memorial Day. I hope you can find a way to enjoy it!
