For institutional investors, portfolio managers not on same ESG page as proxy committees

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Here’s a note from Nawar Alsaadi:

I have written before about the danger of poor ESG integration, and the potential violations to fiduciary responsibility due to lack of adequate ESG governance.

The chart you see in this note is an actual example of ongoing engagements between a number of institutional investors demanding that banks cut funding/lending to companies that are misaligned with a 1.5C pathway (or non-committed to Net Zero) while the investment arms of these same institutions are committing capital to these same misaligned companies. This is literally the engagement equivalent of shooting yourself in the foot.

This kind of negative dynamic is often the product of poor stewardship governance, poor sustainable investment policy, poor policy implantation, and a lack of integrated investment and ESG knowledge at the ESG and investment arms of these institutions. It is critical to point out at this stage that I am fully supportive of banks aligning their lending with a 1.5C warming pathway, but such ask can only take place when one’s exposure to the companies losing out to such funding is eliminated. Working actively to deprive your portfolio companies of funding while retaining exposure to these same companies has fiduciary and systematic risks implications.

Institutional investors that can not or would not divest from portfolio companies that are misaligned with a 1.5C global warming pathway need to pursue their engagements in a proper sequence: first engage with portfolio companies to align with a 1.5C pathway and/or divest from these companies, second, engage with the banking sector to align its lending book with a 1.5C global warming pathway. At minimum, when engaging with banks, institutional investors need to ensure the availability of transition funding to their portfolio companies prior to demanding a blanket funding ban for 1.5C misaligned companies.

I am deeply concerned that poor ESG integration practices could eventually backfire both at the individual institutional level and across the economy if the transition to net zero is mishandled by inadequate understanding of the deep interconnectivity between the various economic actors, and a lack of institutional willingness to invest in the resources required to cultivate such understanding.