Less Shareholder Activism Might Help Feel-Good SRI
A bill in the U.S. House of Representatives has some do-good money managers worried. But other finance professionals see traces of a silver lining for social investing in a measure that seeks to limit shareholder advocacy.
On the face of it, the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act — or “CHOICE” Act for short — looks bad for advocates of socially responsible investing.
Though aimed mainly at undoing key provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, it also seeks to curtail shareholder proposals by limiting such measures to those who own at least 1% of stock in the company in question.
For Pat Miguel Tomaino, associate director of socially responsible investing at Zevin Asset Management in Boston, this represents a significant hurdle to SRI.
This could prove costly to SRI firms, which have already seen a slowdown. Globally, assets in this realm grew about 25% to $22.89 trillion early last year over the previous two years, according to the 2016 Global Sustainable Investment Review. But in the two-year period before that, SRI holdings increased by 61%.
And there are definite regional biases when it comes to sustainable investing. While it’s marginal as a percentage of overall assets in the U.S. – and practically non-existent in Asia – it accounts for about half the assets in Europe and the Antipodes.
Tomaino, whose employer manages more than $500 million, says SRI firms have traditionally “used shareholder proposals to raise concerns about ESG risks to companies.”
Frequently, this influence has been brought to bear “even before market prices or boards become aware of problems,” adds Tomaino. In other words, direct action by shareholders has helped companies make money by forcing them to present better faces to the investing world — on, for instance, more prudent environmental practices and board compositions that better reflect society at large.
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“People who flag risks have had a positive impact,” says Tomaino.
But the Choice Act’s 1% barrier would stop “a very large part of the SRI community” — including specialist managers like Trillium Asset Management and Walden Asset Management as well as some SRI-oriented pension plans from holding companies more accountable, says Tomaino.
And that’s not a coincidence. In Tomaino’s view the point of restricting shareholder activism is to stop companies from “having to deal with investor voices on matters they would rather just blow right by” — largely with short-term costs in view.
About 30% of financial advisor Tom Nowak’s clients “do some kind of sustainable investing” on his recommendation. From this perspective, the Grayslake, Ill.-based FA certainly sees drawbacks in the CHOICE proposal for sharply-restricted shareholder agitation.
But the head of Quantum Financial Planning thinks some good may come of it.
Just as supposedly anti-environmental initiatives linked to U.S. President Donald Trump have seen charities opposing such measures grow in donations and membership, so Nowak thinks some investors may flock to socially responsible investments.
Nowak sees a chance investors may rally around pure-play SRI in reaction to measures out of Congress that limit shareholder activism.
In other words, in a CHOICE Act world, investors may turn from trying to improve companies and put their money to work in outfits that already pass muster as SRI holdings.
“It’s nuanced, so you can’t say it in a slogan, but there’s something to the idea,” says Nowak, whose RIA charges clients by the hour, not on assets under management.
For Nowak, there’s precedence to this approach in the resolution of many pension plans and endowments — including that of Harvard University — to swear off rather than attempt to “greenwash” companies that produce fossil fuels.
And while this cut-and-dry approach doesn’t mesh with the activist modus operandi of many SRI managers, the CHOICE Act’s potential for getting “people motivated to seek out financial products” that meet SRI criteria “could push the needle further in terms of popularizing this form of investing.”
Meanwhile, it’s worth remembering the CHOICE Act hasn’t even passed the House yet, let alone the Senate. However, on May 4 the act passed a Financial Services Committee vote 34 to 26 – along party lines.