ESG Investing: What Shareholders Do Fund Managers Represent?

Abstract

In this Closer Look, we examine individual investor perception of ESG to gauge their concern for environmental and social issues, their view of whether fund managers should use their voting power to influence ESG practices, and their willingness to sacrifice return in the advancement of ESG objectives. We find that investors are not homogenous in their viewpoints and demonstrate significant divergence based on age and wealth, with the most vulnerable investors—those who are older and those with low levels of savings—largely opposed to ESG and unwilling to risk their assets to advance these objectives, in contrast to younger, wealthy investors who are much more supportive and willing to forfeit returns. Significant differences in perception of ESG also exist within and across fund companies. The results suggest that fund managers should consider the various viewpoints of their investor base and potentially split their votes on controversial ESG-related proxy proposals to reflect the divergent interests of beneficial owners.

We ask:
• How do fund managers determine how to vote shares regarding ESG-related proxy proposals?
• How rigorous is the analysis they perform regarding the economic impact of these proposals?
• How do fund managers balance the interests of their investor base when these interests diverge?
• Would split voting improve mutual fund governance by protecting the interest of minority voters—whether that minority is in favor of or opposed to ESG?

Keywords: Corporate governance, ESG, environmental, social, governance, sustainability, socially responsible investing, corporate responsibility, sustainability, ESG ratings, ESG initiatives, individual investors, mutual fund investors, exchange traded funds, willingness to forfeit returns, Millennials, Gener