The capital market paradigm has shifted and leading companies realize they have the opportunity to outperform by taking into account environmental and social risks coupled with transparent corporate governance. Over the past 50 years shareholder advocates have helped birth this new reality, with help from mainstream investors who now routinely support the new ideas and creative solutions proxy season presents each year. While political efforts to roll back the clock are underway, they will crumble against the wall of economic reality investors and companies deal with every day.
Why the shift? Sustainable markets that consider systemic risks clearly will deliver better outcomes for all stakeholders in the long-term. Climate change induced storms and droughts are currently playing havoc with global commodity supply chains and destroying operational infrastructure. Renewable energy is now far less expensive than burning fossil fuels, heralding the end of the internal combustion engine and its ills. Companies with a more diverse workforce outperform their competitors and the best and brightest jobseekers do not want to work for a CEO who makes 1,000 times more than everyone else. Employees and customers also prefer working and purchasing from companies that do not exploit their workers, have toxins in their products and despoil the environment. Finally, many workers are increasingly choosing sustainable investing for their retirement savings—and are starting to participate in capital market democracy by voting their shares.
Success breeds opposition and emulation, which has prompted the recent rise of an anti-ESG crusade. A small band of well-funded zealots is orchestrating the attacks, trying to inject politics and a “culture war” into basic business. Instead of actual free market tenets, these players are using the age-old tools of authoritarians: censorship, government overreach and ideological persecution of vulnerable groups—pursued at any cost, for a select and privileged few. Yet, the capital markets work best when shareholders and corporate executives make their own investment and business decisions. A wave of heavy-handed state laws using big government to restrict free markets and impose investment choices have led seven states to waste an estimated $1.3 billion of their citizens’ cash by overpaying for municipal bonds. State pensions are moving firefighters’ and teachers’ nest-eggs into risky investments that put their life savings at risk.
This is no place for political theater. Some asset managers’ willingness to assess clear risks and opportunities may have chilled, however most investors view the anti-ESG activities as anti-capitalist and ironically as anti-conservative. Polls show the vast majority of a new generation of retail investors, 401(k) plan participants, pensioners, family offices and others who until now have been on the sidelines of proxy voting, support company policies and practices moving toward justice and sustainability. Proxy season showcases these innovative ideas and enables investors to align their actions with their values to shape capital allocation that will ensure financial outperformance and a livable planet.
When companies ignore investors’ voices about shareholder resolutions, boards increasingly are in the spotlight. Three areas that promise to shape director elections stand out. First, the peril of climate change and the need to set and achieve absolute GHG emission reduction targets. This is paramount for retirement plans that are universal owners and most affected when a few companies create systemic harm to the entire portfolio. Second, the evidence is clear that a diverse workforce outperforms on key financial metrics and that all-white management teams underperform. Executives know they must attend to racial justice, gender equality, diversity and equity to build a culture for success. Third, boards of directors know they must be transparent about all their efforts to influence the political arena, through both direct contributions and dark money spent via trade associations and other intermediaries—or face the ire of stakeholders who call out mismatched policies and spending. Major companies are quietly agreeing to treat political spending as they do any capital expenditure, with an ROI analysis and clear metrics.
The long-awaited climate disclosure rule from the Securities and Exchange Commission will soon establish trust between companies and their investors, enabling everyone to grapple with climate risk. Leveling the playing field for market participants has been the SEC’s mission from the start: requiring accurate, standardized disclosure verified by a third party and trusted by all. Human capital, ignored for too long, is next. And, soon we will also have the long-overdue mutual fund naming rule mandating that a prospectus reflects the fund holdings and does not mislead investors.
The shift to a just and sustainable economy is giving forward-thinking investors, company boards and executives a guide to thoughtfully move onto paths for success that will correct mistakes of the past and create a dynamic regenerative world for all. A handful of extremists are desperately trying every tactic to slow the awakening of a mass movement to this transformation; they are on the wrong side of history. The vast majority of Americans are already awake and actively fighting all forms of injustice, oppression and inequality while defending democracy, the free markets and freedom of thought. Some people call that “woke.” Vilifying a word and dividing society will not impede a movement that is committed to bringing people together to solve the most intractable issues that have evaded prior generations. Finding solutions is not a threat to the American way of life, but rather the manifestation of our most precious and sacred values.
Andrew Behar
CEO, As You Sow