By Angela Yap Siew Peng

Investors are cranking up the heat on the world’s biggest companies.

On 1 May, Berkshire Hathaway Inc, the massive Omaha-based investment holding company chaired by billionaire Warren Buffett, clashed head-on with shareholders at its annual meeting.

At the centre of this controversy are two landmark shareholder proposals, billed as the “litmus test for ESG (environmental, social, and governance) investors”.

The first proposal came from a trifecta of institutional investors – California Public Employees’ Retirement System (CalPERS), Federated Hermes, and Caisse de Dépôt et Placement du Québec (CDPQ) – who demand that Berkshire declare physical, transitional, and other financial risks in efforts to address climate change and transition to a low-carbon economy. To date, Berkshire is the only major US or European stock that does not disclose its risk exposure to climate change and whose board has repeatedly rejected these pleas.

Stressing its “unusually decentralised” business model, Buffett – the market’s most vocal opponent to ESG – has repeatedly said “I don’t believe in imposing my political opinions on the activities of our businesses” and gives vast independence to its subsidiaries as long as they deliver on the numbers.

“We are not going to shy away from holding Berkshire accountable just because it’s run by Warren Buffett,” said Simiso Nzima, CalPERS’ Head of Corporate Governance.

The second proposal was for Berkshire to report its diversity, equity, and inclusion (DEI) efforts across its 400,000 workforce. This was mooted by As You Sow, an American non-profit for shareholder advocacy, on behalf of a small retail investor.

Unsurprisingly, both proposals were rejected, given that the ‘Oracle of Omaha’, as Buffett is known, controls almost one-third of votes and continues to hold enormous sway over retail investors.

What is surprising this round is that 25% of shareholders’ votes went against Buffett and his management team, surpassing the usual 3% or less opposition. Media outlets including Reuters comment that this is “greater discontent than Berkshire shareholders historically demonstrate”, leading to questions on whether the 90-year-old Buffett could possibly be out of sync with the times.

Turning the Bend

Whichever camp you’re in, it’s undeniable that shareholder activism is on the rise and investors are demanding that ESG targets be placed squarely on the shoulders of boards and top of the corporate agenda. Even equities and fixed-income investors – traditionally hands-off, holding when they see upside and selling when it reaches peak value – are moving in surprising ways.

Asset managers Aviva and Amundi have announced plans to vote against boards of companies that lack a climate strategy or disclosure policy. This includes multinationals such as Exxon-Mobil and General Motors.

BlackRock, the world’s largest asset manager with USD8.67 trillion in assets under management, has pledged that it will demand disclosure on portfolio companies’ compatibility with (i) a net-zero economy, (ii) board involvement in energy transition strategies, and (iii) talent strategies to improve DEI as appropriate by region.

This January, its chairman, Larry Fink, warned in his influential annual letter to CEOs that “…companies ignore stakeholders at their peril – companies that do not earn this trust will find it harder and harder to attract customers and talent, especially as young people increasingly expect companies to reflect their values.”

This is a major win for sustainability buffs, who’ve long critiqued Fink and BlackRock for fence-sitting.

Woke Capitalism

These writings on the wall point to a new world order. One where the future of markets, economies, and alliances will be based on values rather than ideology, history, geography, or past patterns.

Welcome to the human-centred economy, where ‘wokeness’ – millennial-speak for awareness and action on social justice – is currency.

It’s not unheard of. In Scandinavia, they call it social capitalism. As an ideology, it’s making headway; as a system, its human-centric policies are designed to fix the inequalities of the current economic system.

These thoughts are echoed in Covid and the New World Order: Actionable Insights from Global Technology Thought Leaders, a white paper co-edited by Dr Jane Thomason, Industry Associate at University College London, which seeks to proffer a “rethinking of the economic system, to rethink what we value and to rethink how we live”.

The report’s array of global thinkers has this to say about the financial system: “The pandemic has helped crystallise our collective realisation that the current global economic order, and our financial markets, are not equipped to address the wider environmental and social issues that face humanity.

“We can no longer be complacent, and we have both the theories – a wealth of research around alternatives to a profit-first economic model that still preserve capitalism, such as doughnut economics – and the technologies to implement them for a sustainable future.

“We also need to build the financial markets of the future: markets that recognise the value not only of financial factors but also environmental and social factors, in determining the value of companies and their activities, and in allocating capital.

“It is only through a broadening of our definition of value through internalising the social and environmental consequences of economic activity instead of treating them as externalities as they currently are – that financial markets will shift to allocate value more holistically and to drive the behaviours that we need from companies and their economic activities.”

Hit Reset

If you think such wokeness is by chance, think again.

Like a sleeping volcano, public discontent has been bubbling below the surface. Pre-pandemic, the line between business and social action was already blurring, with most governments being perceived as impotent in wresting big issues like climate change or racial equality. In response, citizens took matters into their own hands and voted with their feet.

From Asian Lives Matter protests and Xinjiang cotton boycotts to NFL players ‘taking the knee’, these modern-day hartal (economic strike action) are increasingly common. Cases of ESG-related derivative litigation (where a shareholder files a lawsuit against an executive officer or director) are also on the rise, pushing the boundaries of the legal system to instil social justice, though these cases are more often than not dismissed by the courts.

So before one dismisses the current ESG wave as another ‘do gooder’ phase, here’s how it supersedes previous efforts in both strategy and unified action.

In terms of shareholder activism, 435 climate- and DEI-related shareholder resolutions have been filed this proxy season in America alone. One of the biggest groups is Climate Action 100+, an organisation with over 500 investor members (including CalPERS, Federated Hermes, CDPQ) with a collective USD54 trillion in assets. Its members have collectively filed 37 shareholder proposals to push big-cap corporates to align or merge climate strategies with business plans. They’ve also released a corporate net-zero benchmark to evaluate board governance on the matter.

In Asia, Harvard Law School’s Annual Review of Shareholder Activism released on 25 January ranks Japan’s Softbank, Nintendo, and Toshiba as the largest global targets of corporate activists pushing for change in the conservative society.

Closer to home, the pressure is top-down with no signs of abatement. Malaysia’s Employees Provident Fund (EPF) – which the World Bank cites as having “transitioned from a relatively small public retirement fund…in 1949 to become now one of the largest pension funds among developing countries” – is in step with global sentiments. Its former CEO Tunku Alizakri Raja Muhammad Alias had previously announced the pension fund’s target to have a fully ESG-compliant portfolio by 2030 and aims “to be a climate-neutral portfolio by 2050, with net-zero greenhouse gas emissions”.

Malaysia’s path of least resistance – as opposed to the confrontational approach in America – is likely to be the prevailing strategy in other Asia-Pacific nations, a top-down approach which minimises resistance and speeds up adoption rates in favour of ESG.

Glimmering Green Puddles

In his 2019 podcast Why It’s Time to Finally Worry About ESG, Harvard Business School’s Prof Robert Eccles explains the start-sputter-and-start-again history of sustainable investing:

“Historically, I think companies came to sustainability long before the investment community, to give them credit. A lot of it had to do with sustainability reporting that started in the late 1990s. It was not a side show but it was definitely not mainstream…They picked the low-hanging fruit – carbon emissions, turn off the water and lights at night and stuff, but it really wasn’t integrated into the business.

“When you talked about sustainability on the investor side, people thought about socially responsible investing, where you were excluding stocks and industries that you didn’t like, or companies that you didn’t like, or even countries, like South Africa under apartheid, and there was the belief that if you put in these values based on exclusions, then you were going to lose returns.

“I think what changed was, as people began to realise that these ESG issues mattered to financial performance, both the corporate community and the investment community started to see things differently.”

“So, I think we’re at the tipping point. I think it’s a top priority,” Prof Eccles concludes.

As the pie grows, so will the dangers multiply. Here’s what banking and finance should keep in mind as it shifts its gaze to greener pastures:

  • Over the next five years, as sustainable investing morphs into a projected EUR7.6 trillion asset class, investors will be increasingly vulnerable to greenwashing. Firms that mislead investors in their ESG disclosures pose a systemic risk, distorting the low-risk and resilient nature of ESG-compliant assets that have weathered the market through the pandemic. To avoid such co-opting, regulators stand en garde with a slate of compliance rules, such as the EU-led Sustainable Finance Disclosure Regulation and relevant sustainable finance taxonomies in the respective jurisdictions.
  • Sustainable finance is more than just climate change. Organisations must enhance and achieve other goals on the sustainability spectrum, such as social inequality, social justice, and diversity and inclusion, which have thus far been eclipsed by the global emphasis of climate targets and the Paris Agreement.
  • All financial actors must up their risk management game. Advanced risk management processes may already be in place at the largest institutional and big-cap firms, but many smaller pension funds or investment companies lack the sophisticated processes needed to address risks arising from ESG investments. This puts both the firm and the clients they represent at the losing end. Whether through valuable knowledge exchange platforms or bringing in specialists to set the levers, regulators, financial institutions, corporations, civil society, and citizens must work shoulder-to-shoulder to rein in excesses.

Doubting Thomas

For a long time, banking – home to many a Doubting Thomas – pooh-poohed values-based investing. It was presumed ESG investments were limited to a return trade-off, i.e. it just wasn’t possible to do good and make a decent profit. But that was many moons and one pandemic ago.

On 9 April, BlackRock’s newest ESG fund – the Blackrock US Carbon Transition Readiness ETF – raked in USD1.25 billion, making history as the biggest launch ever in the ETF industry, proving that “sustainable strategies do not require a return trade-off and have important resilient properties”.

Sustainable funds have also shown greater resilience throughout 2020. In the first quarter of 2020, Morningstar reported 51 out of 57 of their sustainable indices outperformed broad market counterparts, and MSCI reported 15 of 17 of their sustainable indices achieved the same.

Where rubber meets the road, sustainable finance seems to be revvin’ up some serious smoke.

But if you’re still unconvinced…I suppose only time will tell how well a Doubting Thomas fares.

Angela Yap Siew Peng is a multiaward-winning entrepreneur, author, and writer. She is Director and Founder of Akasaa, a boutique content development firm with presence in Malaysia, Singapore, and the UK and holds a BSc (Hons) Economics.