Investor activism: three types of impact

How does HSBC feel when, three months after announcing its “net zero ambition”, it gets slapped by a shareholder resolution on climate change? How does Standard Chartered or Bank of America feel when activists ask why they are handling a bond for the State Bank of India, which has links to a controversial coal mine? How does BlackRock feel when the umpteenth NGO criticizes its ESG record?

“It’s not fair,” that’s probably how they feel. “Look at all the good we are doing and our long statements about it. It’s not a perfect world. Why are you just picking on us – or that kind of activity? “

Do they have a point?

Fifteen institutional investors this week tabled a motion that will be presented to HSBC’s annual general meeting in April, calling for it to beef up its 2050 target of reducing all greenhouse gas emissions from the entities it finances to zero. . Investors want HSBC to actually start in a measurable way cut fossil fuel funding now.

HSBC’s argument is that it needs to stay close to its customers and fund them as they transition to cleaner business models. Almost all of the major banks are active in financing oil and gas companies, which are still essential to the economy. It is wrong to suggest that we can do without it.

The State Bank of India is one of the largest banks in India, a developing country of 1.4 tr people. It is 56% owned by the government. It also happens to be about the only major financial institution still ready 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 broad 10-year civil society campaign to prevent the construction of Carmichael.

When countries are desperate to cut carbon emissions, a brand new, potentially very large coal mine in Queensland is the last thing the world needs.

Many big Western banks and investors have sworn not to fund Carmichael. But if SBI can lend Adani the $ 650 million she needs, and raise $ 600 million on the international bond market a few weeks later (or before – SBI won’t reveal if it has finally decided to make the loan, which has been discussed since 2015), what’s the difference? Erlandsson asks. They might as well give the money to Carmichael themselves. Like-minded investors like Axa and Storebrand agree.

The six external bookkeepers on the bond – Bank of America, Citigroup, HSBC, JP Morgan, MUFG and Standard Chartered – seem to have a different point of view.

They are reluctant about the show but seem to believe that the bond issue is not explicitly linked to Carmichael, the mine is irrelevant.

Western banks arguably feel that there is more to SBI, a mainstay of the Indian economy, than its Carmichael relationship, although this is unpleasant. Their relationship is with SBI and they stick to it.

This month Larry Fink, CEO of BlackRock, is expected to release his annual letter (s) to stakeholders.

Dismayed by 18 months of dragging her feet since she began trying to engage with BlackRock, the Association of Indigenous Peoples of Brazil has came in first with an open letter to fink.

Apib has repeatedly criticized BlackRock’s funding of companies operating in the Amazon region in a way that directly undermines the rights of indigenous peoples and the rainforest ecosystem; who threaten to do so; or who indirectly encourage others to violate human rights and destroy the forest.

The indigenous peoples group wants BlackRock to publish a comprehensive policy on forests and the rights of indigenous peoples to prevent abuse, written in consultation with indigenous peoples.

BlackRock has yet to comment on Apib’s letter, but in October, in response to research document the effects of your Amazon investments, he said: “Deforestation and indigenous rights are critical issues, which also carry risks for returns on investment. We work with companies on these and other ESG risks, and when they are not being managed appropriately or progress is not sufficient, we take action against management.

BlackRock is not alone. Hundreds of investors own the stocks and bonds of companies such as Cargill, Anglo American, JBS and Vale, which Apib says are behaving badly in Brazil.

Operating in emerging markets is difficult; the standards are not the same as in Europe or North America; The economic development of these countries is also a priority.

In each of these cases, investors or activists have chosen a particular financial institution and criticized it for something that others are doing as well. To many – especially those who are criticized – this may seem unfair.

But such injustice is inherent in all human interaction – and in financial markets.

Human beings are social animals. We think in terms of relationships, hierarchies, competition. We speak of “stars”, “leaders”, “laggards”, “champions”, “avant-garde” and “laggards”.

Choosing which targets to focus on is not only essential in business life, but essential.

For this reason, when we deliberately strive for change – whether in the political sphere, such as tackling human rights abuses, or in finance, when we are trying to pick the technological winners and of tomorrow’s customer service – we have to be selective.

When it comes to activism, the choice of targets is often guided – as in the cases of HSBC, SBI and BlackRock – by the activist’s assessment of where it can have the most impact.

Three types of impact in particular come into play, and understanding them is a big part of why particular organizations are at the center of activists’ concerns.

“Impact” is a loaded word in the financial markets. It has become one of the most popular buzzwords among investors who want to feel like they are doing good, while realizing financial return.

“Impact investing” originally meant very specific, targeted and tailor-made investments that generated a measurable social or environmental benefit, which would not have been the case without this specific funding.

It has been broadly adopted by the green bond market, to signify the environmental outcomes of projects to which green bond proceeds are allocated.

The result has been confusing for investors. What is an impact? How do you measure it?

To distinguish between the different types of impact, the Impact Management Project has designed a grid that measures, on one axis, the effect on the world of the activity financed, and on the other, the importance of the contribution. of the investor in carrying out this activity. .

This clearly shows that some investments have more impact than others, in the sense that they are more essential to carrying out the activity.

But as Erlandsson points out, the impact in this sense can also be negative. Giving a dollar to the Carmichael mine can have a bigger impact than giving a dollar to another fossil fuel producer, not just because Carmichael’s emissions are necessarily worse. It has a bigger impact, simply because Adani struggles to fund Carmichael. There aren’t many other places to go for the money.

It follows that by being selective and choosing the right targets, investors can have a large, if not disproportionate, impact in withholding money, as well as investing it.

A second type of impact is determined simply by the size of the entity. BlackRock, JP Morgan, and HSBC tend to receive a lot of criticism as they are among the largest financial institutions of their kind. Moving the needle even a little bit in one of these organizations could have as big an effect as convincing 10 smaller ones to do a full U-turn.

The third impact is related to this, but is more important than the others. It is that the State Bank of India, BlackRock, HSBC and others are, in a more than trivial sense, leaders. They are the strongest players in their industry, whom others see as role models. More than that, they are among the most powerful and influential companies on the planet.

As long as BlackRock, JP Morgan or Citigroup are ready to fund State Bank of India, Vale or JBS, with few questions asked, why should these organizations be worried about anything? They will be able to get money; What if loud activists held up signs and a few investors signaled their virtue by complaining?

Even if these big investors and banks grumble a bit, it may not make any difference.

But if they forcefully express their disapproval – whether by voting for shareholder motions calling for change, or by stating that they want to see the change and that they will withdraw the investment or demand a change in leadership s ‘it doesn’t happen – the response from customers will be swift and impressive.

Bank of America, BlackRock, HSBC and others have established themselves as leaders in the financial industry. This gives them immense power and benefits. Their influence allows them to present themselves as leaders in sustainable development.

But with that power comes responsibility. They hold the reins of finance. They alone can guide him 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 sacrifice – the last thing a business loves is losing business.

But the rewards of becoming a leader in the truest sense are greater than anything they could lose: a more sustainable world.

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