The crusade against “woke capitalism” is entering a new phase in the United States now that Republican politicians turn against ESG policies in asset management. Jan van Eck, chief executive of the global ETF boutique carrying his name, this interference is fully justified, regardless of where one stands on ESG and sustainability investments.
“If we as a society want our companies not to be run by the three big asset managers, then politics will have to interfere,” said Van Eck, speaking to Investment Officer from his workplace in New York.
It is simply ‘anti-American’ to put a lot of power in the hands of a select group of asset managers, Van Eck argued. Still, despite his Dutch roots, it is American values that Van Eck will defend tooth and nail. Now he is calling on politicians to do the same.
‘ESG died in 2022’
“ESG died in 2022” was the title of Van Eck’s latest opinion piece. It is his response to Eric Pan, head of ICI, the US trade association for mutual funds and ETFs, who argued that political interference in the fund industry has reached an all-time low after Texas opposed fund houses that use ESG criteria in investment strategy and voting policies.
Van Eck took him to task: “Fund houses own too large a percentage of listed companies globally. Suggesting that politicians should stay away from that is not just a mistake,” said Van Eck. “It has been US government policy for 100 years to spread concentrations of power.”
Van ECk noted that demand for sustainable solutions is declining, but the question of whether or not ESG is important - from his perspective at least - is irrelevant. “It is’not for a handful of asset managers to determine that, nor for me,” he said.
Too big to vote
The success of index funds and ETFs has meant that only a few fund houses now own 10 percent stakes in many US companies. In some cases their combined ownership exceeds 30 percent. That, according to research by the National Bureau of Economic Research, is enough voting power to determine the outcome of a majority of shareholder proposals.
An asset manager, Van Eck said, should be allowed to vote on a maximum of 5 percent of shares within a company. This does not inhibit “shareholder activism”, he said, and does not even prevent index funds from voting with activists. Activists can therefore “just keep doing their thing,” Van Eck said.
Republican crusade
Moreover, the “low point” of political interference denounced by Pan has not yet been reached, Van Eck said. The Republican-controlled US house of representatives last week blocked Biden’s plans to allow pension funds to take ESG into account in their investment decisions and voting policies.
In doing so, Republicans stop legislation that would make it easier to consider ESG factors in shareholder votes. Officials from states governed by Republicans have launched investigations into voting advisory firms ISS and Glass Lewis. Asset managers like BlackRock and State Street are also under the magnifying glass. Clearly, the industry is not immune to this.
Research by Morningstar showed that the 10 largest asset managers last year supported significantly fewer sustainable shareholder resolutions. It shows that Republican pressure is already affecting the voting policies of large asset managers, said Anne Lafarre, who researches the voting behaviour of asset managers at Tilburg University.
“‘Green’ language in shareholder letters from asset managers has given way to a more nuanced sound,” said Lafarre.
Republican pressure
Surveying the “hearts and intentions” of index investors and active shareholders is not a good idea, Van Eck believes. These intentions of the clients of large asset managers are also less relevant, he said.
“The buyer of an index fund buys baskets of shares by definition: why should they care about their stake in specific companies?” Van Eck said. So shareholders who own funds that blindly follow the index do not deserve the same input into the board as other shareholders.
Van Eck ruefully admitted that capping voting rights at 5 percent is not his own idea. He was inspired by fund industry titan John Bogle, founder of Vanguard. He wrote on the subject in his last contribution to the Wall Street Journal before he died in 2018.
“The industry is naive to think that politicians would not interfere. That’s why I cite Jack Bogle. He knew early on that this was going to be a problem.”
This article originally appeared in Dutch on InvestmentOfficer.nl.