Passive Investing Giants Get More Active on Climate, Diversity

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By Andrea Vittorio

State Street Corp., Vanguard Group, and other big passive investment managers’ increasingly vocal stance on issues such as climate change and diversity shows in the way they vote.

Investors are more likely to vote “for” or “against,” rather than abstain like they did in the past, when these kinds of issues come up at companies they own, according to the latest data from proxy vote processor Broadridge Financial Solutions Inc.

Abstentions, generally seen as having no opinion, were used on environmental and social proposals from shareholders at U.S.-listed companies less than 4 percent of the time this year, Broadridge found. That’s down from more than 9 percent a year ago.

“These large asset managers are coming out and being very specific about what they’re expecting from companies,” Sharyn Bilenker, Broadridge’s vice president of corporate affairs and strategic development, told Bloomberg Law. “When they don’t get that response or they don’t get clarity, they’re really putting their votes where their mouth is.”

Climate Heats Up

The trend toward fewer abstentions showed up in proposals asking companies including Exxon Mobil Corp. to report on long-term business risks from climate change.

The biggest factor in helping the proposal pass at Exxon for the first time was the shift by BlackRock Inc., Vanguard, and other investors that went from opposing a similar request last year to supporting it this year. But a bit more backing came from others like Fidelity Investments and State Street that previously abstained on some or most of their Exxon shares.

State Street, which split its vote at Exxon Mobil last year between shares it controls and those its asset owner clients direct, abstained on about a fifth of all environmental and social proposals globally in 2014. By 2016, it abstained on only one-tenth of them, according to State Street’s most recent asset stewardship report. It’s also using abstentions to send a different message than before. Now abstaining on a vote can mean that a company is doing some, but not all, of what State Street wants to see.

“The more we engage on these issues, the more we understand what good looks like,” said Rakhi Kumar, who leads asset stewardship and environmental, social, and governance investments at State Street’s asset management arm. On climate change, for example, State Street has outlined what it wants companies to report. It’s likewise offered companies guidance on getting more women onto their boards.

“I think that allows us to move away from a pure abstention to have an opinion as to whether this is good or bad,” Kumar told Bloomberg Law. State Street is supporting more environmental and social proposals than it did earlier, but still opposes the majority of them, according to its report.

Support for Diversity

Vanguard is another asset manager that typically abstained on environmental and social issues in the past. Its newly updated voting policy says it may support them if there’s a clear financial argument for doing so.

That tweak in language has already had an impact on voting habits: data provided by Vanguard show it abstained on just 11 environmental and social votes this year, a drop of more than 90 percent from last year.

“While there are some shareholders who vote specifically on social terms, the large institutions are voting with an economic interest as primary,” Paul DeNicola, managing director of the governance insights center at consultant PwC, told Bloomberg Law. He said that’s why disclosing climate risks and boosting board diversity, which has been linked to better corporate performance, have gotten large asset managers’ endorsement while other issues haven’t.

In 2016, Vanguard didn’t vote for any board diversity proposals in the U.S. Instead, it abstained on slightly more than half of them and voted against the rest. In 2017, when Vanguard’s chief executive officer called board diversity “an economic imperative,” not “an ideological choice,” it supported most of these proposals and didn’t abstain at all.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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