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June 09, 2012

Proxy Voting on Climate Change by Mutual Funds Fails to Account for Materiality
    by Robert Kropp

An analysis by Ceres and Fund Votes of 2011 proxy voting reveals that the three largest mutual funds failed to vote in favor of a single climate-related resolution. -- The Rio+20 Conference on sustainable development is fast approaching, and a recently leaked draft text suggests that negotiators remain unwilling to come to meaningful agreement.

Absent the regulatory certainty that a meaningful agreement would provide, voluntary corporate disclosures on environmental and social risks and opportunities are unlikely to deter the impacts of climate change or reverse persistent global patterns of overconsumption. "The incremental progress of such initiatives poses environmental and societal risks," the Dialogue on a Convention on Corporate Social Responsibility and Accountability (CSRA) recently stated.

Perhaps such "voluntary initiatives" might have gone further in addressing sustainability if more mainstream institutional investors acknowledged the financial relevance of climate change and incorporated that knowledge into their proxy voting and engagement policies. But as a recent analysis of 2011 proxy voting patterns indicates, mutual funds�with almost $12 trillion in assets under management, 35% of which is invested domestically�are failing to do so.

In fact, the analysis reveals, the three largest mutual fund companies�American Funds, Fidelity, and Vanguard, which manage a total of $1.6 trillion in US securities�did not vote in favor of a single resolution addressing climate change in 2011. American Funds voted against every climate-related resolution, while Fidelity and Vanguard each abstained nearly 90% of the time.

"The movement over the last few years by Fidelity and Vanguard from voting against all shareholder resolutions related to climate change to abstaining on most is a very small step in the right direction," Mindy Lubber, president of Ceres, said. "But it also a very passive strategy that simply defers responsibility to management."

The proxy voting policies of the three largest mutual funds do little more than note that economic factors associated with environmental issues will be considered. "These decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund's investment and management is not responsive to the matter," the policy of Vanguard states.

The analysis of the proxy voting patterns by mutual funds was provided for Ceres by Fund Votes. spoke with Jackie Cook, founder of Fund Votes, about the findings of the analysis.

"Even now, surprisingly few proxy voting guidelines mention hydraulic fracturing," Cook said, although resolutions addressing the issue gained an average of 40% of shareowner support in 2011. "If we see a massive increase in voting in favor of environmental and social resolutions, I'd be surprised, because their proxy voting guidelines haven't changed at all."

"With so many environmental and social resolutions being voted on now, it's amazing that their guidelines aren't more specific," Cook continued.

The survey further reveals that even some mutual funds with publicly stated positions on climate change and sustainability are lagging in their support for climate-related resolutions. BlackRock and AllianceBernstein, for example, are signatories to the United Nations' Principles for Responsible Investment (PRI)�and have therefore agreed to " incorporate environmental, social and governance (ESG) issues in our ownership policies and practice"�but each fund supported fewer than five percent of the climate resolutions on which they voted in 2011.

By ignoring the financial impacts of climate change, mutual funds "are not accountable to their financial stakeholders, particularly their beneficiaries," Cook observed. "A lot of the beneficiaries of mutual funds' assets are 401K plan holders. But mutual funds seem more accountable to managers of corporations than 401K plan holders."

The economic case for corporate management of climate-related risks was given additional credence, Cook pointed out, when the Securities and Exchange Commission (SEC) issued guidelines "intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors," the Commission stated.

"Maybe this is what it takes for the mutual funds," Cook said. "A clear regulatory signal that emissions are going to cost more in the future." And when the voting policies of the 30 largest mutual fund companies are considered, there is a discernable increase in support for environmental resolutions. In 2011, overall support exceeded 21%.

The analysis confirms that a small number of large mutual funds are indeed voting in favor of environmental resolutions in a majority of cases. The Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), for example, voted in support of environmental resolutions 65% of the time. Wells Fargo, Fifth Third, Credit Suisse, Oppenheimer, GMO, and Delaware all voted to support more than 50% of such resolutions.

TIAA-CREF is a PRI signatory and a member of the Investor Network on Climate Risk (INCR), a $10 trillion investor initiative coordinated by Ceres.

Yet even that silver lining is not without its clouds. Last year's analysis by Fund Votes revealed that in 2010, TIAA-CREF voted in support of 82.6% of climate resolutions. In 2011, TIAA-CREF abstained from voting on 23% of such resolutions. Resolutions which TIAA-CREF abstained from voting on in 2011 addressed such issues as the adoption by a number of companies in high-emitting industry sectors of quantitative greenhouse gas (GHG) emission reduction goals; the appointment by Chevron of a board member with environmental expertise; and reporting by ExxonMobil on hydraulic fracturing.

"So many resolutions address the issue of climate change, and the issue is now becoming such an important investment consideration," Cook said. "But the guidelines of the large mutual funds are almost uniformly quiet with respect to climate change. We need to see a change in proxy voting guidelines."

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