In this new blog post, Preventable Surprises’ Corporate Lobbying Alignment Project (CLAP) research intern Sule Dedekarginoglu shares her insights on asset manager responses to corporate lobbying and provides a preview of Preventable Surprises’ upcoming asset manager scorecard.
The momentum for responsible investing and the push for a more sustainable global financial system has been growing in recent years. As more investors commit to incorporating environmental, social, and governance (ESG) issues into their investment decisions, scrutiny is growing on companies. Until now, investor ESG commitments have tended to focus on environmental factors and soft climate action commitments linked to 2050 decarbonisation targets. But in the past year, the “dual pandemics” of COVID-19 and racial injustice, and the challenges to the integrity of US democracy, have made investors pay more attention to social and governance factors. Rioting at the US Capitol on 6 January underscored the systemic risks linked to corporate capture of public policy, the decline of trust in politics, and a weakening of democratic stability. The distrust of government and rejection of facts by large swathes of the American population stems in part from the extent of corporate money influencing all levels of US government. Registered lobbyists alone spent close to $4 billion on influencing political outcomes in 2020, suggesting their influence over politics will continue to grow.
In order to better understand how investors and other stakeholders are responding to the political volatility and other market risks linked to corporate policy capture, Preventable Surprises, as part of the CLAP, is assessing how the world’s top 50 asset managers approach corporate lobbying by their portfolio companies and report on their own political spending and trade association memberships. Our analysis considers asset manager proxy voting records on corporate lobbying disclosure shareholder resolutions across several key sectors. In the process of creating the CLAP asset manager scorecard, we will engage the global asset management community to focus on the risks linked to negative lobbying and policy capture across key sectors of the economy.
Initial observations on investor responses to corporate influence
Our series of CLAP online roundtables has shown that investors are only beginning to appreciate that a globally connected financial system requires a systematic approach to disclosure of corporate engagement in political activities and policy influence across markets. Principles around ethical lobbying already exist at the UN-PRI, OECD, and elsewhere, but are not yet central to investor stewardship activities, nor are these principles part of internal controls within the asset management companies themselves. In order to begin to change this, investors can request investee companies provide comparable information on corporate lobbying, political finance, and influence spending. They can also prepare to disclose their own, internal approaches to lobbying and influence to clients and investors, in the case of listed asset managers.
The preliminary results of our research (to be released in May 2021, currently based solely on publicly available information and subject to change), on the world’s 50 largest asset managers show that only a handful of asset managers currently identify corporate lobbying as a stewardship theme. The majority of the investors we are evaluating (58 percent) provide only limited transparency on their policies and engagement outcomes concerning corporate lobbying. This is because they either do not disclose these policies or provide insufficient information. For the remaining 42 percent of asset managers who do identify corporate lobbying as an issue, we have noticed a lack of consistency in the type of information provided and in the level of detail of this information. Within the group of asset managers who do mention lobbying, climate change is a priority issue, while political finance and other ‘S’ themes are not currently mentioned.
Trade association membership is another element in the CLAP scorecard. Transparency on trade association membership is important as these organisations are among the most significant channels of policy influence and sources of corporate money entering politics. Investment industry associations and trade associations including the American Legislative Exchange Council fought hard to dismantle financial sector reforms in the Dodd-Frank Act and other efforts to create a more stable and transparent financial system. At this stage in our research, only 24 percent of asset managers we have reviewed appear to disclose trade association membership information. While some asset managers provide a full list of their trade association memberships, others instead disclose either a partial list or explain the role of their sustainable investing team in industry associations and networks but do not provide details. A more uniform approach to disclosing this information would enable a better understanding of how asset managers’ public commitments to democracy and a transparent public policy process align with their conduct. In particular, it will be important for clients of asset managers, including pension funds, to understand what issues the asset manager lobbies on via its trade association membership.
Stewardship codes are another area where greater transparency and clarity in reporting would help asset manager clients and other stakeholders to better understand how asset managers approach lobbying risks. At present, an asset manager’s headquarters location determines which stewardship code they refer to, or whether they even refer to stewardship principles at all. The reference to principles-based stewardship codes, rather than regulatory reporting means that asset managers can use their discretion to limit disclosures. In order to create more useful and comparable data across G20 markets, asset owners and other stakeholders can start asking for more uniform disclosure by the world’s largest asset managers on lobbying policies and practices, beyond reference to the uneven disclosure based on national stewardship codes. Asset owner voices can begin to change the behaviour of fund managers across the sector this decade.
The 2020s could be a decade of investor action on lobbying and policy capture
The world’s largest asset manager is beginning to address lobbying in its engagement with investee companies. But there is still inconsistency between Blackrock’s engagement and its own internal approach to lobbying. In its 2021 stewardship expectations report, BlackRock Inc. notes that it will require investee companies to align their respective corporate political activities with their public statements on material and strategic policy issues. Blackrock further expects companies to monitor the positions taken by trade associations where they are members on material issues “for consistency and to provide an explanation where inconsistencies exist.” While it is commendable for BlackRock to set these expectations so publicly, the asset manager has been subject to scrutiny regarding its own lobbying disclosures and corporate influence practices. In January of this year, pension funds with over $1 trillion in assets under management (AUM) urged BlackRock to disclose its own political activities following the U.S. Capitol riots. The letter to Chairman Larry Fink raises concerns regarding risks to the asset manager’s reputation from its political activities, as well as inadequate disclosure of its trade association payments, including “historic failure to support efforts by other shareholders to promote greater transparency regarding political spending and lobbying.” While BlackRock and its Chairman may be the first large asset manager to make such public statements on the need for lobbying alignment, the rest of the industry will have to step forward to address the issue with urgency. The CLAP asset manager scorecard hopes to enable action across the largest asset managers to respond to the systemic risks arising from corporate capture in key sectors of the global economy. We welcome your feedback: let us know what you think investors should aspire to in 2021 and the coming decade.
Sule Dedekarginoglu is a research intern working on Preventable Surprises’ Corporate Lobbying Alignment Project (CLAP). The CLAP is an applied research and engagement project that seeks to make corporate political capture a central component of investors’ approach to ESG stewardship and integration. Learn more about the CLAP and sign up for the monthly online investor roundtable series here.