GWR Genesee and Wyoming Inc

By Kimberly Chin 

A small group of niche investors guided by environmental, social and governance principles are emerging as a big influence on corporate decision making.

These investors -- religious funds, boutique asset managers and single-issue organizations -- are routinely punching above their weight in driving companies in their portfolios to address sustainability issues and ethical concerns. They're doing so by filing frequent shareholder resolutions and pushing other shareholders, including asset managers many times their size, to play along.

These smaller asset managers "have an explicit mandate from their investors to advance environmental and social performance at their investing companies," says Jackie Cook, director of sustainable stewardship research at Morningstar Inc.

A measure of their success in fulfilling that mandate is getting the big index-fund providers on board with their initiatives. The Big Three -- BlackRock Inc., Vanguard Group and State Street Corp. -- collectively control an average of one in five shares of the S&P 500 companies, giving them an outsize role in voting power and influence, according to a working paper published in June by the National Bureau of Economic Research. The three firms together are responsible for 25% of the shareholder votes cast at S&P 500 companies and 22% of the votes cast at Russell 3000 companies, the researchers found. Niche investors have frequently sought to gain the backing of large index funds in the pursuit of environmental and social initiatives as a way to amplify their message and increase pressure on companies. In some cases, they succeed.

Seeing results

About one-third of ESG resolutions are filed by self-identified socially responsible investors, the largest group to do so, followed by pension funds and faith-based managers, according to the Sustainable Investments Institute, a nonprofit that tracks resolutions and proxy votes.

In 2017, sustainability-focused investors asked energy infrastructure company Kinder Morgan Inc. to start measuring, monitoring and setting reduction targets for methane gas emissions across the company's operations. The resolution was co-filed by Robeco Institutional Asset Management BV, employee-owned investment firm Miller/Howard Investments Inc. and faith-based asset manager Mercy Investment Services Inc. "We are long-term shareholders," says Carola van Lamoen, head of active ownership at Robeco. "We engage for change because we are convinced that it is in the long-term interest of the company." The proposal came up to a vote at last year's annual shareholders' meeting.

Though their specific proposal didn't pass, the methane reduction targets were eventually included as part of a broader resolution calling for a sustainability report that got a majority of votes. Both resolutions garnered the support of BlackRock, Vanguard and State Street.

In October 2018, Kinder Morgan published its first formal report giving more details on its methane emission reduction practices.

Calvert Research & Management, a subsidiary of Eaton Vance Corp. that manages ESG funds, filed a shareholder resolution with railroad company Genesee & Wyoming Inc. in December 2017 requesting the company set reduction targets for greenhouse-gas emissions. The resolution got a 57% vote of support at the company's general meeting in 2018, and was backed by the Big Three. The company subsequently published a sustainability report and indicated its intention to adopt carbon-reduction goals.

Getting shareholder resolutions in front of management and boards helps niche funds set themselves apart. When it comes to voting the proxies on ESG proposals, these investors have a much better record compared with the ESG-focused funds at bigger asset management firms, which often cast votes that conflict with their sustainability mandate, says Morningstar's Ms. Cook.

A BlackRock spokesman says the firm's voting record reflects a thoughtful approach to ESG initiatives. "Just because something says 'climate,' we're not going to automatically vote on it," he says. "We don't want to be a rubber stamp. We don't think that's good stewardship."

Toward diplomacy

Overall, the number of ESG shareholder resolutions that have come to a vote has gone down in recent years. But the number of proposals withdrawn has risen, indicating investors' success in getting managers to engage in dialogue before initiatives get as far as the ballot -- an approach embraced both by niche investors and the biggest fund firms.

Nearly half of all environmental-related proposals were withdrawn in advance of 2019 meetings, compared with 33% two years ago, according to ISS Analytics, the data arm of proxy-advisory firm Institutional Shareholder Services. There seems to be a "greater willingness on the part of companies and proponents to negotiate outcomes on environmental topics," says Peter Kimball, head of advisory services at ISS Corporate Solutions, a corporate governance and sustainability consultancy. Around 45% of shareholder proposals related to social issues were withdrawn last year, up from 34% two years earlier, according to ISS.

While the large asset managers say they don't file resolutions on ESG issues or any other topic, they aren't sitting on the sidelines, either. The firms say they engage directly with management and boards to press them on ESG issues. Direct engagement gives a company a better understanding of the risks and helps it create pathways to address these issues, they say.

"Having that open dialogue with a company is going to be more insightful and produce better outcomes" than a more adversarial approach, says a BlackRock spokesman.

Niche investors say they see value in diplomacy as well. But they also don't always have the clout to successfully negotiate with a company. As a result, shareholder resolutions are often seen as a last resort to get a company's attention on an issue or to push it toward further discussion when initial discourse doesn't pan out.

Still, companies are more responsive to engaging with their shareholders today, says Anthony Eames, the director of responsible investment strategy at Calvert. He says Calvert is filing fewer resolutions and having more meaningful dialogues with companies. "Companies are more sensitive to areas where they're not performing," he says, citing the influence of social media on today's corporate policy.

Ms. Chin is a Wall Street Journal reporter in New York. Email kimberly.chin@wsj.com.

(END) Dow Jones Newswires

September 22, 2019 22:17 ET (02:17 GMT)

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