We too easily forget the progress that has been made on ESG over the last decade, to the extent that I suspect that we have forgotten what the ‘G’ in ESG originally stood for.
It was ‘G’, for Governance, and it was included because so few shareholders voted, leaving company management largely unchecked in what they did. Now shareholder voting is common, and the subject of genuine shareholder engagement. Management can no longer help themselves to unchecked generous remuneration, or mis-allocate capital into pet projects with impunity. The battle for ‘G’ has been largely won!
If shareholder engagement is really here to stay, then a more difficult question emerges. What are we voting for? In the past, the purpose of our voting was to maximise the returns to us, the shareholders, by making sure that management behaved in shareholder-friendly ways. The purpose of all that Governance, voting and corporate engagement was to achieve better financial returns for us – the missing ‘F’ in ESG.
The point is that G, unlike E (environmental) and S (social), is a means to an end and not an end in itself. With E and S we can’t just say to managers ‘Go and vote’, we need to tell them what they are to vote for. Is it F, E or S, or perhaps a bit of each? In practice, Trustees find these decisions awkward and often fruitless if the views are widely divergent.
At Yoke and Co we often recommend that where there is no stand out issue on the Board, Trustees should adopt a manager’s ‘broad spectrum’ policy which will cover many of the mainstream issues (and most managers will in turn be guided by voting agencies). The more controversial issues at the cutting edge of the debate, such as fossil fuel divestment, remain largely bespoke issues. However, who knows what will be widely accepted as normal by the end of this decade given the progress made on voting in the last?
To find out more about the financial governance support we offer and how we can help you make better financial decisions, read more about our approach, including a recent case-study.
Happy New Year.