Investor support for corporate sustainability initiatives has been derailed. In the face of strong ideology against Environment, Social and Governance, or ESG, investing in the United States, major fund managers such as BlackRock, Inc. and the Vanguard Group, Inc. have backed away from asserting that ESG factors are responsive to investor concerns and relevant to long-term, systemic wealth creation. In response, the Canadian Securities Administrators have paused their work on climate and diversity related disclosure requirements.
A growing number of U.S. states have taken measures to curb investor support for corporate social responsibility. Litigation under federal pension legislation and a recent White House executive order have increased scrutiny of proxy voting and other engagement practices relating to sustainability concerns.
The Texas Attorney-General recently announced a US$29.5-million settlement with Vanguard in a claim alleging that co-ordinated stewardship and net-zero initiatives of major asset managers constituted unlawful anti-competitive conduct. While denying wrongdoing, Vanguard agreed to “strict passivity commitments” limiting its ability to influence corporate strategy or support ESG shareholder proposals.
All of this is out of step with global capital market norms, where climate and other sustainability-related financial risks are increasingly viewed as requisite investor-focused disclosure and risk management discipline.
What underlies this arrest of corporate social responsibility initiatives?
In the face of apparent governmental inability to effectively address legitimate social concerns, a new class of “universal owners” (dominant institutional investors that effectively own shares in the entire market) felt obliged to fill the gap to best serve the long-term interests of their clients.
It turns out that governments have been unwilling, rather than unable, to weigh in on sustainability concerns. As investor-led ESG successes gained traction, they faced the same political obstacles that blocked direct governmental action in the first place. Opponents galvanized political players to lash back. When anti-woke, anti-climate coalitions are strong enough, they can mobilize governmental activism to block shareholder initiatives.
What other lessons might be learned?
In modern markets, shareholder rights are primarily exercised by asset managers, who serve as fiduciaries but do not bear the direct economic consequences of how those rights are exercised. Chilling this delegated voice does not eliminate influence. Rather it is reallocated from capital providers toward corporate management. The risk is of fragmented stewardship and diminished oversight.
In this environment, it may behoove sustainability advocates to focus on better aligning with management, rather than (or in addition to) institutional shareholders. In the U.S., at least, corporate executives have tended to prevail in legislative and regulatory contests. There is ample historical precedent for effective coalitions between corporate executives and other, non-shareholder, stakeholders. Each have strong incentives to curb the short-term, profit-focused exercise of shareholders’ power – a focus that is contrary to the longer-term and more systemic view of universal owners.
It has also become clear that direct political action is critical to success. This will require a focus on building stronger, more resilient social movements. Ones in which even interim defeats can win converts and shift public expectations until seemingly radical proposals become mainstream and, ultimately, are reflected in law.
The focus should be on a movement away from rationality toward reasonableness. While “rationality” focuses on the maximization of self-interest, “reasonableness” supposes that decision makers act with reference to others in society and to agreed-upon principles and norms – that is, show a concern for the protection and enhancement of the common good.
Reasonableness reflects an understanding that while our market and political systems have achieved tremendous successes, their potential to serve the common good can only be achieved if they are guided by a sense of social purpose.
Corporate law and regulation are in a state of constant reinvention, reflecting social norms as they evolve and unfold. In a period of polarized viewpoints, the focus of sustainability advocates (within and outside the corporate sector) should be less on slogans and more on “facts on the ground” – strong risk management discipline, consistent and supportable disclosures, and aligning stewardship practices with fiduciary prudence.
Few have been faulted for disciplined ESG strategies grounded in, and substantiated by, what firms actually do.
Edward Waitzer is a senior fellow at the C.D. Howe Institute and a former chair of the Ontario Securities Commission.