Institutional investors, index fund managers and proxy advisory firms applying ESG principles to investments came under scrutiny Tuesday during a hearing held by the Senate Committee on Banking, Housing and Urban Affairs.
Of particular concern to Committee Chairman Mike Crapo, R-Idaho, was how ESG shareholder proposals impact retail investors. He said that in the 2018 proxy season, ESG proposals were the largest category of shareholder proposals on proxy ballots, with 15% climate related and 14% related to political contributions. "It is important to understand how institutional investors are voting the shares of the money they manage to make sure that retail investors' interests are being reflected in these voting decisions," Mr. Crapo said at the hearing.
"Are these shares being voted to drive productivity in our economy and increase investors' return on their hard-earned investments, or are intermediaries using other people's money unbeknownst to them in order to advance environmental, social and other political policies?" he asked the panel of witnesses.
The answer may be the latter, James R. Copland, senior fellow and director of legal policy for the Manhattan Institute for Policy Research, told the committee. "In recent years, regulatory changes and changes in market ownership have combined to increase the shareholder voting power of institutional investors," he said. Mr. Copland called on Congress and the Securities and Exchange Commission to scrutinize whether institutional investors and other intermediaries, such as proxy advisers, "are subject to capture by interest groups with values misaligned from those of the ordinary diversified investor and in tension with efficient markets and capital formation."
On the issue of whether ESG factors have a negative impact on investment returns, John Streur, president and CEO of Calvert Research and Management, told the panel it is "a common misconception" that incorporating ESG investment strategies requires investors to sacrifice returns, or is inconsistent with asset owners' and managers' fiduciary duty.
Mr. Steur noted that by one estimate, $745 million will be spent globally on ESG data by 2020, yet while 85% of companies in the S&P 500 already actively report on ESG risk factors voluntarily, "much of the information provided through voluntary disclosures is difficult to compare and inconsistent across issuers, resulting in considerable costs and resource expenditure for investors."
The SEC should act to require uniform disclosure of corporate ESG factors, said ranking committee member Sherrod Brown, D-Ohio.
"Investors know there are many environmental, social, or political risks that could reduce long-term value, but companies are not providing that information," Mr. Brown said.
"Enhancing and standardizing these disclosure requirements will merely bring the SEC up-to-date with other rules around the world."