Ricardo Jimenez (Sigma Rocket) | In the last 18 months, sustainability has definitely made its way to the top of investors’ agendas. Gone is the old Corporate Social Responsibility driven by companies, a kind of philanthropic activity towards society, corporate marketing with little interest for fund managers.
This change in mentality, supported by the circumstances arising from Covid 19, is being driven directly by investors, both institutional and retail. There is no longer just a demand for a company to be included in a sustainability index, which in many cases had become a formal exercise of filling out surveys and forms. Investors want to know in a concrete way, not the paper policies of companies regarding a wide range of issues, but their effective implementation, their real impact or whether the remuneration of managers is linked to the achievement of “non-financial”, concrete and measurable objectives. Linking financial remuneration to the achievement of these objectives is probably the most efficient way to arouse the active interest of company managers.
Some funds, such as TCI, have written to the companies in which they participate and have requested and obtained, as in the case of Aena, that climate change policies be approved by the General Shareholders’ Meetings. This fund has clearly expressed its intention to vote against the reelection of directors in those companies that do not report their level of emissions or that do not have a credible plan to reduce them. They could also vote against the auditors if the annual report does not adequately reflect climate risks. The sale of the company’s shares is also a possibility. These public charters are public and accessible to everyone.
As a consequence of this new investment paradigm, the inflow of money into this type of “sustainable” funds in the first quarter of this year has reached $178 billion globally, according to Morningstar data, compared to $38 billion in the first quarter of 2020. That huge influx of money has had a major effect on the revaluation of many companies, and also of specific ESG indices.
The financial industry and in particular fund managers have reacted quickly to capture this new type of clients, who want to align their investments with their values and principles. A survey by the Morgan Stanley Institute for Sustainable Investing estimated at 95% the percentage of millennials whose investment decisions are based not only on making money, but also on the contribution of these investments to overall social well-being.
A huge volume of fees is at stake in the coming decades. In an industry where fees are structurally trending downward, ESG funds have become the star product to attract higher volumes and charge higher fees. BlackRock has just launched the U.S. Carbon Transition Readness ETF with fees of 0.50% per annum compared to the 0.03% charged by other funds such as the iShares Core S&P 500 ETF, with a very similar composition, but without the “sustainable fund” label.
The enormous effort by fund managers to attract new clients has raised alarm bells. Tariq Fancy, former Chief Investment Officer for Sustainable Investing at BlackRock, has warned that sustainable investing has become a huge marketing exercise and called for regulators to intervene.
The US regulator (SEC) announced last March the creation of a “Climate and ESG Task Force” whose mission is to detect irregular conduct or incomplete reporting practices by both companies and fund managers. In April, the SEC again published a series of recommendations, calling for greater transparency in the composition of these products. It asks fund managers to disclose the weight of ESG factors in the construction of investment portfolios, their decision-making process and the disclosure of their policies regarding the companies in their portfolios.
In May, President Biden signed an executive order on financial risks related to climate change, highlighting the request to the Treasury to incorporate this type of information into regulation and supervision in line with what is already required by the European Union.
The stock market has definitely dyed green, seeking a “sustainable” generation of commissions.