Those in the impact investing space have long believed that ESG considerations are not just good for the planet or society but represent a fundamental part of fiduciary duty, and major fund managers and regulators alike are beginning to show that they understand that stance as well. Reversals of Trump administration rules limiting ESG fund options in retirement plans pave the way for a majority of Americans to potentially have access to impact options in what, for many, are their primary investments. This expansion, combined with the newly proposed rules from the Biden administration that would permit ESG options as the default in retirement plans, could allow for widespread adoption of impact. At the same time, regulators are working to implement more stringent standards for funds claiming to have an ESG approach to make it easier for investors to distinguish between those with a genuine commitment and those merely seeking to profit from the growing interest in impact investing. Taken together, we hope to be headed toward a future where the average investor has greater access to a higher quality universe of impact investing options.
Fund managers responsible for tens of trillions of dollars, including BlackRock and Vanguard, are similarly responding to what is increasingly understood to be the material investment significance of issues like climate change and are voting for shareholder resolutions accordingly. BlackRock backed 64% of environmental proposals in the 2021 proxy year, up from 11% the previous year.1
In the News
Hundreds of companies trading on the Nasdaq Inc. stock exchange may be forced to add diverse directors for the first time or explain why they haven’t after U.S. regulators approved Nasdaq’s proposed new listing requirements. Of the more than 3,000 companies listed with Nasdaq, more than a third lack a racially diverse director, and more than one in 10 have no women on their boards. About 8% had neither a woman nor a person of color on the board. While the Nasdaq rule requires only disclosure and an explanation of any lack of diversity, regulations in several states have been proposed or are set to take effect, including a requirement for companies based in California to have one diverse director by the end of 2021.
Wall Street Journal
BlackRock, along with Vanguard and other prominent investors, has taken a more involved approach to the shareholder advocacy process, exercising their significant voting power with the companies in which they invest. BlackRock funds withheld support from 10% of board directors on company shareholder ballots, or more than 6,500 director election proposals, in the year ended in June, up from 8.5% the previous year. BlackRock also increased support for shareholder-led proposals, supporting 35% of those proposals in the 2021 proxy year, up from 17% during the 2020 proxy year. The willingness of large investment managers to engage in shareholder advocacy changes the landscape of the growing movement significantly. Funds of BlackRock, Vanguard and State Street Global Advisors held nearly 20% of the S&P 500 at the end of March and are among the largest shareholders of many companies.
Wall Street Journal
American officials are investigating asset manager DWS Group after its former head of sustainability claims that the firm overstated how widely it used sustainable-investing criteria. The outcome of the investigation seems likely to be one of the first significant indicators of how U.S. regulators will address issues of managers overstating the role of ESG consideration in their investment processes. The EU has already enacted regulations around ESG fund classification designed to address the same issue, resulting in a $2 trillion decrease in sustainably invested assets between 2018 and 2020, despite net inflows. The good news for investors is that better transparency and regulation of ESG funds will make them more confident that they have invested in funds that fully live up to their ESG claims.
Harvard University will end all of its investments in fossil fuels, including investments directly in companies that explore for fossil fuels or develop them and indirect investments in the industry through private equity funds. Harvard’s $41 billion endowment and its historic status make it perhaps the most significant American institution to divest from fossil fuels. The move also marks a reversal of the university’s previous position, in which former president Drew Gilpin Faust said that she did not want to use the endowment as a “tool to advance social change.”
New York Times
The Labor Department proposed rule changes earlier this month that would make it easier for retirement plans to add investment options based on ESG considerations and allow for such options to be the default setting upon enrollment, provided that this did not require the funds to take on additional risk. These proposed changes make clear that retirement plan administrators are permitted to consider ESG factors and that the economic consequences of issues including climate change may make it their duty to do so.
Research & Reports
Global Sustainable Investing Alliance
The Global Sustainable Investing Alliance released their biennial report examining the state of sustainable investing in major financial markets globally. At the start of 2020, global sustainable investment assets under management (AUM) reached $35.3 trillion, a 15% increase since the 2018 report, including $17.1 trillion in the U.S. Global sustainable investment AUM now represents 35.9% of total AUM, up from 33.4% in 2018. The most common sustainable investment strategy is ESG integration, followed by negative screening, corporate engagement and shareholder action, norms-based screening and sustainability-themed investment.
1Wall Street Journal. “BlackRock, Other Investors Target Climate Issues, Covid-19 Response and Board Seats in Shareholder Votes.” August 21, 2021.