Investor activism: three kinds of impact
Big firms like HSBC, BlackRock and JP Morgan are always being criticised for environmental, social and governance failings. The remedy lies in their hands.
How does HSBC feel when, three months after announcing its “net zero ambition”, it gets slapped with a shareholder resolution on climate change? How does Standard Chartered or Bank of America feel when activists ask why they are managing a bond for State Bank of India, which has links to a controversial coal mine? How does BlackRock feel when the umpteenth NGO criticises its record on ESG?
“It’s not fair” is probably how they feel. “Look at all the good we do, and our lengthy statements about it. It’s not a perfect world. Why are you just picking on us — or on this kind of activity?”
Do they have a point?
Fifteen institutional investors this week filed a motion that will be presented at HSBC’s annual general meeting in April, calling on it to flesh out its 2050 target of reducing all the greenhouse gas emissions of the entities it finances to zero. Investors want HSBC to actually start measurably reducing fossil fuel financing now.
HSBC’s argument is that it needs to stay close to its clients and finance them as they transition to cleaner business models. Nearly all large banks are active in financing oil and gas companies, which are still essential to the economy. It is wrong to suggest we can do without them.
Last bank standing
State Bank of India is one of the largest banks in India, a developing country of 1.4tr people. It is 56% owned by the government. It also happens to be just about the only large financial institution still willing to finance the Carmichael coal mine, being built in Queensland, Australia by Adani Enterprises, the Indian conglomerate controlled by Gautam Adani.
This mine is “the heart of darkness” when it comes to climate change, according to Ulf Erlandsson, a bond investor turned capital markets activist who has joined the wide 10 year civil society campaign to stop Carmichael being built.
When countries are desperately trying to reduce carbon emissions, a brand new and potentially very large coal mine in Queensland is the last thing the world needs.
Many big Western banks and investors have sworn not to finance Carmichael. But if SBI can lend Adani the $650m it needs, and raise $600m in the international bond market a few weeks later (or before — SBI will not reveal whether it has finally decided to make the loan, which has been discussed since 2015), what’s the difference? asks Erlandsson. They might as well be giving Carmichael the money themselves. Like-minded investors such as Axa and Storebrand agree.
The six external bookrunners on the bond — Bank of America, Citigroup, HSBC, JP Morgan, MUFG and Standard Chartered — seem to have a different view.
They are reticent about the issue but appear to believe that since the bond issue was not explicitly linked to Carmichael, the mine is irrelevant.
The Western banks no doubt feel there is more to SBI, a pillar of the Indian economy, than its Carmichael relationship, even if that is distasteful. Their relationship is with SBI and they are sticking by it.
Forests at risk
This month Larry Fink, CEO of BlackRock, is expected to publish his annual letter or letters to stakeholders.
Dismayed by 18 months of foot-dragging since it first started trying to engage with BlackRock, the Association of Brazil’s Indigenous Peoples has got in first with an open letter to Fink.
Apib has repeatedly criticised BlackRock’s financing of companies which are active in the Amazon region in ways that either directly harm indigenous people’s rights and the rainforest ecosystem; that threaten to do so; or that indirectly encourage others to trample on human rights and destroy the forest.
The indigenous people’s group wants BlackRock to publish a comprehensive forests and indigenous rights policy to prevent any abuses, drafted in consultation with indigenous people.
BlackRock has not commented on the Apib letter yet, but in October, in response to research documenting the effects of its Amazon investments, it said “Deforestation and indigenous rights are critical issues, which also carry risks to investment returns. We engage with companies on these and other ESG risks, and where they are not being appropriately managed or progress is not sufficient, we take voting action against management.”
BlackRock is not alone. Hundreds of investors hold the shares and bonds of companies such as Cargill, Anglo American, JBS and Vale, which Apib believes behave harmfully in Brazil.
Operating in emerging markets is difficult; standards are not the same as in Europe or north America; these countries’ economic development is also a priority.
In each of these cases, investors or activists have singled out a particular financial institution and criticised it for something others also do. To many — especially those criticised — that may seem unjust.
But unfairness of this kind is inherent in all human interaction — and in financial markets.
Human beings are social animals. We think in terms of relationships, hierarchies, competition. We talk about “stars”, “leaders”, “laggards”, “champions”, “cutting edge” and “behind the times”.
Picking which targets to focus on is not only central to business life, but essential.
For that reason, when we deliberately set out to bring about change — whether in the political sphere, such as combating human rights abuses, or in finance, when we try to pick the technological and customer service winners of tomorrow — we need to be selective.
When it comes to activism, the choice of targets is often driven — as in the cases of HSBC, SBI and BlackRock — by the campaigner’s assessment of where she or he can have the most impact.
The bottom dollar
Three kinds of impact in particular come into play, and understanding them goes a long way to explaining why particular organisations are the focus of activists.
'Impact' is a charged word in financial markets. It has become one of the most popular buzzwords among investors who want to feel they are doing good, while also making a financial return.
‘Impact investing’ originally meant very specific, targeted, bespoke investments that achieved a measurable social or environmental benefit, which would not have happened without that specific financing.
It has been adopted wholesale by the green bond market, to mean the environmental results of the projects for which the green bond proceeds are earmarked.
The result has been confusion for investors. What is impact? How do you measure it?
To distinguish between the different kinds of impact, the Impact Management Project has devised a grid that measures, on one axis, the effect on the world of the activity financed, and on the other, the importance of the investor's contribution to bringing that activity about.
This makes it clear that some investments are more impactful than others, in the sense that they are more crucial to making the activity happen.
But as Erlandsson points out, impact in this sense can be negative too. Giving a dollar to the Carmichael mine may have a bigger impact than giving a dollar to another fossil fuel producer, not just because the emissions from Carmichael are necessarily worse. It has a bigger impact, just because Adani is finding it very difficult to finance Carmichael. There are not many other places it can go for money.
It follows that, by being selective and picking the right targets, investors can have a big — indeed, an outsized — impact by withholding money, as well as by investing it.
Big is ugly
A second kind of impact is determined simply by the size of the entity. BlackRock, JP Morgan and HSBC tend to get a lot of criticism because they are among the biggest financial institutions of their kind. Moving the needle even a little bit at one of these organisations could have as big an effect as convincing 10 smaller ones to make a complete U-turn.
The third impact is allied to that, but is greater than the others. This is that State Bank of India, BlackRock, HSBC and others are, in more than a trivial sense, leaders. They are the strongest players in their industries, whom others look to as role models. More than that, they are some of the most powerful and influential companies on the planet.
As long as BlackRock, JP Morgan or Citigroup are willing to finance State Bank of India, Vale or JBS, with few questions asked, why should those organisations worry about anything? They will be able to get money; so what if noisy activists wave placards and a few investors signal their virtue by complaining?
Even if these big investors and banks grumble a bit, it may make no difference.
But if they indicate their disapproval forcefully — whether by voting for shareholder motions calling for change, or stating that they want to see change and will withdraw investment or demand a change of leadership if it is not forthcoming — the response from clients will be swift and impressive.
Bank of America, BlackRock, HSBC and the rest have made themselves leaders in the financial industry. That gives them immense power and benefits. Their clout enables them to paint themselves as leaders in sustainability.
But with that power comes responsibility. They hold the reins of finance. Only they can guide it in a better direction. If they don't like criticism — and they don't — the actions they need to take are clear. They will involve sacrifices — the last thing any firm likes is to lose business.
But the rewards of becoming a leader in the truest sense are greater than anything they could lose: a more sustainable world.