Institutional shareholders are increasingly using their “voice” in matters of corporate policy, and, in particular, are taking an interest in “environmental, social, governance” (ESG) performance measures at their portfolio companies. Investments are selected, and shareholders engage with management, using a variety of ESG metrics, often concerning matters like climate change, gender and racial diversity, and similar issues. Though it’s often argued that some ESG engagement reflects the investors’ personal policy preferences rather than a sincere attempt to improve corporate performance, it seems that at least some ESG factors are, in fact, wealth maximizing. It’s also been argued that many institutional investors have already diversified away their vulnerability to idiosyncratic risks and, by engaging on ESG matters, are attempting to protect themselves against systemic risks.
Nonetheless, the trend has met with some criticism. One set of concerns pertains to protection of retail investors to whom the institutional investors owe fiduciary duties – fear that their money is being used to advance social causes favored by the investment manager, rather than to benefit investors in the fund.
A parallel set of concerns has less to do with protecting fund beneficiaries than with protecting portfolio companies. In the most charitable account,
