Mutual Funds’ Strategic Voting on Environmental and Social Issues

Do Environmental and Social funds vote the way they talk? Do they walk the walk or only talk the talk? Every year, around March-April, asset managers like BlackRock, Vanguard or Fidelity vote on behalf of their millions of funds investors in thousands of proposals at their portfolio companies. In recent years, their votes on environmental and social proposals have taken the spotlight. Indeed, the extent to which these managers support environmental and social proposals is an important factor in the debate concerning the impact of institutional investors on firms’ attitudes towards ES issues. It is equally relevant to efforts by the SEC and other regulatory agencies to encourage institutional engagement and tackle concerns over greenwashing.

The debate is important. These asset managers control some of the largest stakes at the biggest companies, so their support of environmental and social proposals is paramount for these issues to break into the corporate agenda. As importantly, asset managers have the fiduciary duty to vote in their investors’ best interest, and most of them offer funds with sustainability-related labels. Thus, an investor in, say, the BlackRock ESG Multi-Asset Fund, can reasonably expect that its fund will support a good share of environmental and social proposals. As it turns out, when it really matters, these expectations might not be met.

So, do funds with sustainability labels vote in line with the principles they advertise, or do they greenwash their votes? This is a tricky one. As Jon Hale, Head of Sustainability Research at Morningstar, argued, “while we expect sustainable funds, in general, to be supportive of environmental and social proposals, we also expect them to be discerning about how they vote rather than automatically supporting all such proposals”. Indeed, some of the environmental and social proposals are eccentric and bizarre, and even the most ES-oriented investors would hope that their funds vote against them.

Whether to appease their shareholders or to fulfil their fiduciary duties, ES funds seem to care about their voting records. In a recent paper published in the Review of Finance, Professor Roni Michaely, a Co-Director of the Hong Kong University, Jockey Club Enterprise Sustainability Global Research Institute at HKU, together with Professor Silvina Rubio and Professor Guillem Ordonez-Calafi from the University of Bristol in the UK, uncover a voting strategy by which some sustainable funds greenwash their votes. These environmental and social funds are supportive of environmental and social proposals that are likely to pass or fail by a large margin, but their support decreases significantly when their votes are more likely to be pivotal: that is, for close votes, when their votes really count, they tend to vote against these proposals. This strategy results in a high average support rate of environmental and social proposals, seemingly consistent with their fiduciary responsibilities, while allowing these funds to oppose ES proposals when their vote matters the most.

Which funds vote this way? And why? These strategic voters are sustainable funds sponsored by the traditional, often largest asset managers which do not have an overarching sustainability agenda. These are the fund families that (legitimately) care more about value than values (such as the environment). One can imagine a conflict between the fund family objectives and those of the environmental and social funds they manage. As environmental and social funds, they are supposed to incorporate ES values into their voting decisions. However, they are subject to a conflict between their stated goals as an ES fund and the objectives of their sponsors (the family), which have different priorities. The voting pattern that we identify allows funds to exhibit high average support for ES proposals, presumably pleasing their investors. Yet, when their votes truly count, they vote against ES proposals, consistent with the preferences of their sponsoring asset managers. It seems that they can hold the stick at both ends. Interestingly, environmental and social funds who are sponsored by ES families do not exhibit this behaviour.

In 2021, Allison H. Lee, the then acting chair of the SEC, declared “Investors are demanding ESG investment strategies and opportunities, but funds may not always reflect those investor preferences in their voting. Addressing this agency cost is at the heart of corporate governance today.” This research shows that funds’ stated objectives (e.g., environmental) affect their support for ES proposals, but the family ideology seem to be more important. This is relevant to investors who care about investing responsibly and improving the ES policies of the firms in which they invest. The outcome of this research indicates that investor who care about investing in sustainable funds should pay special attention not only to the fund investment philosophy but also to the family fund ideology. It is also important to policy makers: the work might suggest that the current regulation isn’t sufficient to “illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders’ best interests” (SEC Rule 30b1-4).

This article is based on the research conducted by Professor Roni Michaely, Professors Silvina Rubio and Guillem Ordonez-Calafi from the University of Bristol, titled “Mutual Funds’ Strategic Voting on Environmental and Social Issues.” The research has been published in the European Corporate Governance Institute – Finance Working Paper No. 774/2021. You can view it at the following websites:

Professor Roni MICHAELY
Associate Dean (Global Engagement), HKU Business School
Co-director, HKU Jockey Club Enterprise Sustainability Global Research Institute

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Mutual Funds’ Strategic Voting on Environmental and Social Issues