Pigs, proxies, and passives

From the top

🍟 In a proxy season that has been described as “one of the most significant ever for ESG shareholder proposals,” none is more high profile than Carl Icahn’s campaign against McDonald’s. Ostensibly about pig welfare, it’s also “a pointed warning” for BlackRock, Vanguard and State Street, who collectively own 21% of McDonald’s stock. In an open letter, Icahn derides “the biggest hypocrisy of our time: Wall Street firms capitalizing on ESG to drive profits without doing nearly enough to support progress.” The result of the vote will “come down to what the index funds think about it.”

☮️ And what do they think? Common Wealth warns index funds are “holders of the last resort,” having grown their fossil fuel stake to 40% of total fund ownership as active funds retreat. In an analysis of 30 asset managers (25 GFANZ signatories) Reclaim Finance finds none apply restrictions to the 46% of passive assets under their remit. Nor are they flexing via engagement: The FT reports “big asset managers” have shied away from fossil-fuel financing proposals at banks. (Or maybe they aren’t needed. As one banking analyst tells Responsible Investor, they do have recycling bins.)

🧮 If index funds are the problem, index providers are on the hook. “Just three firms dominate the index business,” says Common Wealth, and yet, despite an “unignorable position in the allocation of capital and decision-making power,” they remain “under-scrutinised and under-regulated.” While the benefits of the [ESG] index revolution are shared by providers and distributers, it’s unclear who bears responsibility for their impact. (N.B.: Asset mangers exclude passive assets from their emissions estimates, something the UN-backed Science Based Targets initiative wants to change.)

🚮 “ESG ratings make no sense,” tweeted Elon Musk about Tesla’s MSCI score (A, climate-misaligned)—incidentally, one year to the day after MSCI made the now-famous decision to upgrade McDonald’s (BBB, climate-aligned). Given 60% of all retail money in ESG is directed by MSCI, it’s a viable third target of Icahn’s campaign—though he may have as much luck here as with the “Wall Street firms.” McDonald’s’ upgrade was not in recognition of any action over its rising supply-chain emissions rivalling those of a European country, but a reward for having installed recycling bins.

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Getting dirty to go green

Green economies are made out of metal. Right now, we don’t have access to all the metal we need. And even if we did have access, metals, like fossil fuels, are a) not in unlimited supply, and b) difficult to extract without decimating environments. 

This week, a study commissioned by industry body Eurometaux warned of a “metal supply crunch” that could derail decarbonisation and digitalisation. Earlier this month, LGIM warned that “without a growing, responsibly run mining industry there will be no energy transition.” Then there was McKinsey’s meticulous research into the metal requirements of the EV and renewable industries, all predicated by the IEA’s landmark report last year, in which it warned of a “looming mismatch” between the energy transition and mineral supply.

Three things have changed since the IEA went to press. First, Russia’s invasion of Ukraine forced countries to reevaluate their dependency on imported oil & gas. Second, Russia’s invasion of Ukraine exacerbated supply chain shocks and so access to materials. Third, Russia’s invasion of Ukraine made the prospect of relying on autocratic regimes—of which the world’s largest metal exporter is one—less attractive.

The silver lining of Eurometaux’s report? Up to 75% of Europe’s clean energy metal requirements could, eventually, be met through local recycling, with Deloitte echoing that “circular solutions” will help “the industry “demonstrate that it’s responsible enough to produce the vast quantity of metals required for a low-carbon future.” In the meantime, LGIM says, asset managers need to engage to improve its performance. There are plenty of places to begin.