Shareholder Influence on ESG

One of the main problems of ESG is that some companies will do the bare minimum to be able to advertise themselves as an ESG company, making promises on ESG initiatives that never end up being fulfilled. However, there has also been controversy over the ESG initiatives that are carried out. Although ESG initiatives are intended to produce positive environmental and social change, not everyone has been happy with the effects.

To begin, several megabanks such as JPMorgan Chase, Citibank, and Wells Fargo have engaged in certain ESG practices such as refusing to lend money to companies in certain industries such as oil, and companies that do not meet certain standards of racial equity. A large factor in their decisions has been because of the influence and demands of shareholders.

In theory, all investors can provide input and vote on decisions because they own a portion of the company. But since the majority of shareholders do not own a large enough share of the company to have a significant impact on executive decision making, most of the influence comes from proxy voting. Proxy voting essentially allows an investment manager such as MFS to vote on behalf of many individual investors. All of the investors' individual shares are consolidated under a singular party and therefore hold a lot more influential power. Under ideal circumstances the investment manager would conduct their proxy vote based on the interests of the majority of the shareholders. However, there are often way too many shareholders for this practice to be practically implemented, and assumptions and generalizations are often made. Specifically in the case of these megabanks, in which millions of Americans own shares in their retirement accounts, politicians have criticized the proxy voting process for “weaponizing unsuspecting Americans’ voting rights” to advance an agenda.

But why are politicians so upset with initiatives targeted at reducing carbon emissions and ensuring racial equity? It is because the exclusion of certain companies can cause inadvertent consequences. In Texas, state authorities produced a list of 10 companies that are boycotting oil and natural gas companies. That is because in Texas, oil companies are essential to the state economy. The problem with proxy voting and the influence of investors is that oftentimes, they are advocating for ESG initiatives without accounting for the broader economic impacts. This can be problematic, especially in a state like Texas where the economy relies so heavily on the oil industry.

Although ESG initiatives inherently do have benefits, they should not be considered in isolation, and it is important to also consider a variety of other factors. That is why many companies such as MFS advocate ESG integration, so ultimately ESG initiatives will be able to contribute to a more positive overall impact.