How to change corporate ESG behavior

The growth of socially responsible investing (SRI) has skyrocketed over the past several years. There is now over $17 trillion, or nearly 1/3rd of all capital under management, within funds that include progressive environmental, social and business governance (ESG) and similar criteria within their investment decision making process. Many large investment firms, including BlackRock and Vanguard, are calling upon companies within their portfolios to prioritize long-term ESG considerations over short-term profit generation. With that kind of financial leverage, positive ESG changes in corporate behavior should be easy and straightforward to accomplish.

It’s not that simple.

Corporations and investment managers have a long history of verbal support for progressive ESG policies followed by either inactivity or actual efforts to oppose those principles. Although asset managers put, “significant effort into meeting institutional pressures to demonstrate transparency and responsible behavior,” their actual investment behaviors were inconsistent with responsible ownership. In 2019, a New York Times commissioned review of the proxy votes cast by BlackRock and Vanguard found that these two biggest fund managers, “tended to side with management and vote against shareholder-sponsored resolutions more frequently than other big fund companies,” including ESG focused efforts. SEC regulators reported this April that several investment firms that market themselves as investors in companies that that pursue ESG strategies were making potentially misleading statements about their ESG investment processes as well as their adherence to global ESG frameworks. More recently, five of the nation’s largest banks recommended to their shareholders that they reject racial equity resolution audits after previously expressing solidarity with the Black Lives Matter movement.

Despite these roadblocks, creating positive changes in corporate ESG policies is still possible. Boycotts, like the ones that targeted companies doing business with the former apartheid South African government, can succeed, but they are difficult to coordinate and maintain. A better technique is through investor advocacy whereby shareholders, because of their ownership position, can influence corporate policies. Just one recent example is the success of the environmentally focused investment firm, Engine No. 1, in their efforts to place independent Board Directors at Exxon.

Although often effective, this type of advocacy it is only available to mutual funds and other entities that own sufficient shares in the corporation. It is essentially impossible for an individual to afford enough shares to be able to positively influence the hundreds of corporations whose ESG policies need to be addressed. While there are several ESG focused advocacy organizations that coordinate such activities for both individual and institutional investors, they do not provide a mechanism for non-investors to influence corporate ESG strategies.

Another approach is required for the general public and other stakeholders to have an impact on corporate ESG policies. Most corporations are extremely sensitive to public opinion and expend extraordinary amounts of effort and expense to protect their reputation. This makes public pressure a very effective means to compel changes in corporate behaviors. Witness Delta Airline’s CEO’s rapid reversal of his support of the new restrictive Georgia voting laws in response to public outcry. And since shareholder resolutions submitted to a vote at corporate annual meetings are often non-binding, they can be ignored by corporate management unless supported by a significant amount of popular demand.

Integrating public pressure with shareholder engagement is the most effective way to compel positive changes in corporate ESG policies. By coordinating shareholder advocacy with social pressure, Advance ESG provides the public a voice in corporate decision-making. This allows individual investors and non-investors alike to help make corporations more environmentally and socially responsible.