Large Investment Players Seek to Change the Investment Landscape

Earlier this year we looked at the concept of large investors starting to take a stand with regards to the actions of those they invest in. In recent news, this trend is potentially continuing, with some of the world’s largest players now focusing on issues such as climate change and short-selling. In this short post we will review these stories and continue analysing the trend as it develops.

We have looked at the concept of ESG many times, and the first story we shall assess focuses on the ‘E’ component. Yesterday the Independent ran with the story that Sir Christopher Hohn, the founder of TCI Fund Management, said that he will begin taking purposeful and potentially impactful action against firms he is invested in who do not take the issue of climate change seriously – his firm has more than £21 billion in assets under management. He has decided to focus on the issue of disclosure, stating that the firm would move to ‘vote against all directors of companies which do not publicly disclose all of their emissions and do not have a credible plan for their reduction’. In order to push for this increased rate of disclosure, and to have it standardised, Hohn will be pushing for the companies it invests in to report their total carbon emissions via CDP – an independent environmental consultancy. He goes on to make the valid point that ‘investing in a company that doesn’t disclose its pollution is like investing in a company that doesn’t disclose its balance sheet. If governments won’t force disclosure, then investors can force it themselves’. Bloomberg recently called Hohn the Hedge Fund Industry’s ‘own Greta Thunberg’, and Hohn lives up to this billing as we see that he has accused the world’s largest asset manager – BlackRock – of ‘greenwash’. Other firms that he has identified as needing to improve Airbus, Moody’s, and Charter Communications. Hohn is quoted as saying that ‘investors have the power, and they have to use it’, which is a welcome notion because it has been identified that, for a number of reasons, institutional investors have been reluctant to take on this role. The question is, however, whether Hohn’s sentiment will be found to be lip-service, or whether investors are genuinely starting to take a greater role in the governance and progression of the companies they invest in.

In terms of a wider lens, the role of investors upon the shaping of the marketplace is another factor that needs to be considered. In the second story we will be assessing, Japan’s largest – and the world’s largest – governmental pension fund will no longer be allowing overseas shares to be lent out from its $733 billion global equity portfolio. What does this mean in simple terms? It means that ‘short-sellers’ will be potentially impacted negatively, which has drawn an immediate and positive response from Elon Musk who declared that it is ‘the right thing to do! Short selling should be illegal’. Short-selling, in essence, is a trading strategy that speculates on the decline of a stock or security, rather than its success. Investopedia discusses how the strategy may be employed by speculators, or by investment managers to hedge against risks elsewhere in their portfolios, but the sentiment from Japan is that the move by Mr Mizuno – the fund’s Chief Financial Officer – essentially brands the practice of short-selling as ‘non-ESG’ because the process of short-selling, which is based upon the short-seller first borrowing the shares, means they cannot then vote on internal governance issues as associated with that share’s voting rights (because they do not own the share themselves). However, a number of onlookers have pointed out that mechanisms exist to cover for this issue. For example, asset owners can require that their shares are returned for voting purposes. It has also been argued that securities lending is ‘critical to properly functioning markets’, which is why Mizuno’s recent move has been labelled as divisive and has encountered many internal objections. Whether or not other institutions like the Government Pension Investment Fund follow suit and, effectively, brand the process of short-selling remains to be seen. However, and despite the objections raised and the arguments of ineffectiveness, Mizuno’s move is just the latest in a growing line of instances whereby investors are starting to impact on how ESG, as a principle, is being adhered to by companies. Perhaps that in itself is the biggest positive from this story.

The role of investors in aspects such as maintaining good governance within companies has been researched from within a number of fields. Perhaps the new field to analyse is how ESG, as a concept, is being monitored and enforced by investors. We have seen elements relating to disclosure and business model being focused on by investors, with business practices changing as a result. Yet, the question remains as to how such initiatives are to be coordinated and developed from an investor-standpoint, because it is taking certain characters and organisations to take the lead – who is to say that they will continue doing so? If the wave of sentiment changes, who will be leading that? That question is, then, how does society utilise the position and subsequent power of institutional investors to its advantage? Is it even possible to do so? One would likely be forgiven for arguing that it is not and that, in effect, wider society is a slave to the marketplace. Yet, there may be things that can be done, like an elevation in the research and media scrutiny on concepts and developments such as ESG and the associated fervour that is accompanying its implementation. The focus on ESG is societally-positive, so the more it can be championed the more that entities such as institutional investors will feel more obliged to contribute – particularly if it is demonstrated, economically, that it is beneficial (which research has suggested that it is). The hope is that ESG does what ‘ethical investing’ never managed, and becomes mainstream. If it does, it may be the case that ESG-related considerations become a norm, which is the ultimate goal.

Keywords – ESG, Investment, Short-selling, institutional investors, @finregmatters