The next phase of shareholder activism

Climate change graffiti Waterloo Bridge © Getty images
Investors must consider the ethical stance, whether they want to or not

There’s a stockmarket “melt-up” coming. So, at least, says Larry Fink, chief executive of the world’s largest asset management company, BlackRock.

He could easily be right. The miserable pessimism of the last quarter of 2018 looks to have been a tad overdone. Most indicators are pointing towards some economic improvement (even in Germany). The world’s central banks are backing off the idea of any monetary tightening. And there is a lot of uninvested cash knocking around the sidelines.

If he is right, you will want all your money to be in the stockmarket, probably via a fund of some kind. But which one? I have bad news for you. The choice is getting harder, not easier.

Until recently, you might have made a choice based purely on the kind of returns you reckon you’d get. You’d think about diversification, valuation and asset allocation. If you had, say, a particularly strong streak of do-goodery in you, you might find it in yourself to sacrifice a little potential return and buy a fund marketed as “ethical”.

Today, however, you may find you don’t get to make a choice about whether your fund is “ethical”. All big fund management companies will tell you that their funds make that minimum grade one way or another.

This week Legal & General Investment Management published some genuinely praiseworthy statistics about its efforts to improve the world. Its corporate governance report states its clear aim as “working to bring about real positive change to create sustainable value”.

In pursuit of this, L&G voted against the election of more than 3,000 directors globally in 2018; voted against more than 100 UK chairs on gender diversity grounds; supported more key shareholder resolutions on climate change in the US than any of the world’s ten largest asset managers; and as a result of its climate change pledge, dumped eight large companies from its Future World Fund range.


It also went for excessive executive pay (hooray), opposing it much more often than some of its larger competitors. You’ll see similar things in the ESG (environmental, social and governance) reports from most fund managers: I have a pile of them on my desk and you will be pleased to know that everyone is telling us they are voting more often, engaging more forcefully and generally being properly active in their role as representatives of the end owners of equities (that’s us, by the way).

I’m pleased about it too. Regular readers will know that I’ve been whingeing here for a decade about fund manager stewardship failure: how managers failed to act as real shareholders in the big banks before the financial crisis, for example, and how they have allowed the executive pay scandal to become as huge and divisive as it is.

But along with approval, I am also beginning to feel a little discomfort. When does justified do-goodery shift into over-reach?

Go back to Larry Fink. In his annual public letter to chief executives this year, he made many of the usual points about the importance of operating for the long term, having purpose and understanding that what we used to consider externalities — damage done to the environment in the course of doing business, for example — can no longer be placed outside the scope of corporate responsibility.

That all fits nicely with my ideas of what stewardship should be. There’s plenty of research suggesting that diversity can improve performance; that companies that give workers a sense of purpose have a tendency to outperform; and that short-termism is a fast track to underperformance. So the arguments that businesses should be pushed into taking account of these things are perfectly valid.

But Mr Fink also went a little further than usual in his assumption of a reasonable role for asset managers and corporates. Perhaps, he suggested, as our governments are not getting to grips with the global problems fuelling “anger, nationalism and xenophobia”, the public are now looking to corporations for leadership on everything from “protecting the environment to retirement to gender and racial inequality”. At a time of great political and economic disruption, he told company executives, “your leadership is indispensable”.

Hmm. Mr Fink still says that BlackRock has no intention of telling companies what their purpose should be and he also accepts that companies cannot be instructed by him to “solve every issue of public importance”. But add to his commanding tone the kind of language used by Jane Sydenham of Rathbone Investment Management on L&G’s general ESG excellence and you will see my point.

We are, she says, entering the “next phase in shareholder activism”. Investors want to see investment managers taking on corporate management. So “whereas in the past they didn’t feel a moral duty to do this, increasingly now they do.” Key phrase: “a moral duty”.

The problem here is a simple one. Politics and morals are not absolutes in the way that financial returns are. They are also matters that sit outside the true areas of expertise and knowledge base of most financial market participants — and inside those of governments, who in the end do take all the tough decisions.

So while one might want Mr Fink and his competitors to push a large company to ensure it has a long-term strategic plan and is fair in its dealings with suppliers, using the power of other people’s money to ask it to address, say, populism, might be a step too far.

No one actually asked our most powerful asset managers — unelected and overpaid financial middlemen — to become the chiefs of the global morality police. But somehow, as the mostly laudable ESG agenda begins to mission-creep, that’s what they appear to be turning into.

You might be fine with that. You might not be. The point is that when you start looking for the fund that’s going to take you into the predicted melt-up, you have to do more than just check the charges and the investment methodology. For better or worse, you will also have to check the ESG report of its providers. You aren’t just choosing a financial instrument any more. You are choosing a moral universe. And that’s what makes it harder.

• This article was first published in the Financial Times.