When ESG funds don’t walk the walk on climate change votes
Jackie Cook, Director, Stewardship Research, Morningstar
Greenhouse gas emissions are among the societal-impact outcomes that BlackRock Impact U.S. Equity (BIRAX) considers when evaluating stocks for its portfolio. At the same time, during 2018’s corporate proxy voting season, the fund voted against three greenhouse gas and climate-change shareholder proposals. The resolutions called for greater greenhouse gas disclosure from Chevron (CVX), Fluor (FLR), and Range Resources (RRC).
The BlackRock fund wasn’t alone among other sustainable-investing funds offered by large fund companies that cast votes on behalf of their investors against climate-change-related company proposals. Environmental, social, and governance funds from Vanguard, Fidelity Investments, and TIAA-CREF, among others, cast a number of votes that seemingly conflict with an ESG mandate, including funds specifically aimed at the environment.
By way of contrast, among nine fund companies with an ESG focus, not a single vote was cast against climate-change resolutions that garnered more than 40% of the shareholder vote.
Much of the focus when evaluating funds with an ESG mandate is on the screens and research used to decide which companies to include in a portfolio. But proxy voting and engaging with corporate management are two other ways in which funds can have a more direct impact on corporate policies that align with their ESG mandates.
In this article, we look at how ESG funds voted in the 2018 proxy season on climate-related shareholder resolutions. More narrowly, using the Morningstar Fund Votes database, we examined the difference in voting patterns on funds sponsored by ESG specialists and ESG funds from non-ESG fund companies.
As a starting point, we found that during 2018, 14 shareholder resolutions addressing climate change earned more than 40% shareholder support. These resolutions are listed in the table below.
Technically, none of the proposed measures would be binding on management given the advisory status of shareholder resolutions. However, 40% support reflects broad shareholder sentiment considering that many investors routinely vote in line with management’s recommendations and against such resolutions.
Eight of the 14 resolutions earned more than 50% support. This means a significant portion of shareholders defied corporate management’s recommendation to vote “against” each of these proposals.
Voting against management is rare in part because many traditional fund companies say that they prefer to “engage” with the company, lobbying for change as shareholders.
Dedicated ESG firms also use engagement with companies to help effect change, but they are significantly more willing to use their votes to make their voices heard.
The next exhibit shows that asset managers with an ESG orientation unanimously voted for the 14 climate-related shareholder resolutions across all funds managed. Some of the firms were also filers of climate-related shareholder resolutions.
However, sustainable funds offered by some of the larger traditional asset managers were not uniformly supportive of climate-related resolutions. The following table shows instances where sustainable funds backed by these asset-management brands voted against one or more of the strongly supported climate resolutions listed in the first exhibit.
One reason for the inconsistent voting pattern among funds offered by non-ESG-specialist firms relates to their proxy-voting practices. At some firms, proxy votes are consistent across the entire fund family irrespective of their mandate. At other firms, individual fund managers have more discretion.
The votes of sustainable funds offered by traditional asset managers were consistent with votes of the larger fund family. Each cell in the table below shows the vote split between sustainable funds and other funds offered by the same asset manager.
There are exceptions. BlackRock’s sustainable ETFs and iShares MSCI Global Impact ETF (SDG) supported the sustainability report request at Acuity, and BlackRock’s low-carbon-target ETF (CRBN) alone supported the greenhouse gas goals resolutions at Fluor. The BlackRock sustainable funds’ voting practices are governed by a separate set of voting guidelines and showed a more differentiated voting pattern on other types of shareholder resolutions. Funds offered by Nuveen, which was acquired by TIAA-CREF in 2014, supported the methane disclosure resolution at Dominion, where the TIAA-CREF funds, including TIAA-CREF Social Choice Equity (TISCX), voted against the resolution.
While 2018 voting records show gaps in climate voting, if we compare the votes of the largest asset managers across all climate-related resolutions in 2018 with those of the previous two years, we see that voting patterns have shifted considerably. A survey of the votes cast by the largest asset managers across all funds shows a year-on-year increase in support for all climate resolutions voted since 2016.
An earlier version of this article first appeared in Morningstar Direct.