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January 07, 2017

Many Large Mutual Funds Continue Failure to Address Climate Change
    by Robert Kropp

Ceres updates its annual report on voting climate-related resolutions by mutual funds, noting that several PRI signatories failed to support a single resolution in 2016. First in a two-part series.

SocialFunds.com -- When a financial institution chooses to become a signatory to the United Nations' Principles for Responsible Investment (PRI), it pledges to incorporate the six Principles, including the third: “We will seek appropriate disclosure on environmental, social and governance (ESG) issues by the entities in which we invest.” One avenue for seeking such disclosure that has been embraced by sustainable investors is the power of the proxy, through the filing and voting on shareowner resolutions addressing sustainability.

So how can it be that several of the world's largest mutual funds—including Vanguard, American Funds, BlackRock, and Fidelity—persist, year after year, in failing to support a single resolution relating to climate change filed with corporation in which they invest? The most recent
update from Ceres on climate-related voting by mutual funds reveals that the four aforementioned PRI signatories, among others, scored zeroes in their support for such resolutions.

“It is troubling to see BlackRock, JP Morgan (5% support for climate resolutions), BNY Mellon (4%) and others routinely vote against important shareholder resolutions seeking reasonable disclosure and goals to manage climate change,” Tim Smith of
Walden Asset Management observed. “How is this consistent with their fiduciary duty to protect their clients interests?”

Furthermore, in the specific case of Vanguard, more than two-thirds of its holdings are passive investments in index funds, where divestment is not an option. Thus, the only avenue open to the PRI signatory for effecting legitimate change is through corporate engagement, including proxy voting.

Writing about the findings, Rob Berridge of Ceres proposed the following possible scenarios:
1. Executives of the mutual funds refuse to acknowledge that climate change is real;
2. They fail to recognize the investment implications of climate change; and
3. Fund executives prioritize private engagement to such an extent that they agree to withhold support for climate resolutions.

Addressing the third point, Berridge observed, “While it is true that face-to-face discussions initiated by major investors can have a strong influence on companies, it does not remove the fiduciary duty to vote proxies conscientiously on important bottom-line issues.”

“Many institutional investors engage with companies on resolutions while also voting for them,” Berridge continued. “Voting arguably adds teeth to the negotiations.”

Of course, more cynical observers might well argue that many financial institutions seize upon PRI membership as a low-risk means of burnishing their corporate reputations. After all, at present, the PRI has more than 1,400 signatories with total assets under management approaching $60 trillion. One can only surmise how the persistent shortcomings of the current capitalist system could be overcome if the totality of those assets were truly invested in sustainability.

One strategy for sustainable investors is to file shareowner resolutions with the mutual fund companies themselves. “The proxy voting records on climate change of investment firms and mutual funds are under increasing scrutiny by investors and clients,” Smith of Walden said. “As a result, investors have filed a resolution with five investment firms urging them to review their proxy voting policies and record, as some vote against virtually every social and environmental shareholder resolution.”

One final note. “The great majority of mutual fund companies voted in favor of many climate-related resolutions,” Berridge wrote. So genuine options for sustainable investors do exist. Moving investments to funds that vote responsibly on climate-related resolutions may be the most effective way to get underperforming funds to align practice with aspiration.

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