Forget Shareholder Resolutions, Fund Manager Says Hire Better Directors

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Jan. 10 (Reuters) – A Texas-based fund manager is not hopping on the bandwagon of his peers backing shareholder resolutions that call on companies to take stronger action on climate change. Dimensional Fund Advisors argues that it would be more effective to simply replace directors of companies who fail to resolve the problem.

Austin-based Dimensional only backed a tiny fraction of the climate-related shareholder resolutions followed by Boston-based rights group Ceres last year.

Company executives said measures requiring everything from emissions reporting to contingencies for extreme temperatures may or may not be important to investors, even if the measures are passed.

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While Dimensional wants boards of directors to oversee environmental risks, “Not all environmental issues are important to shareholders,” Jim Whittington, Dimensional’s responsible investment manager, said in a recent interview.

Meanwhile, Dimensional voted against corporate directors more often than its rivals, although it’s not clear how often those votes stemmed from environmental issues.

Whittington said business leaders are in the best position to judge a company’s exposure to climate risk.

“Our overall philosophy is that we try to protect and enhance shareholder value,” added Whittington. For some companies, measures to counter or adapt to climate change can certainly make sense, he said.

In 2021, Dimensional only supported two of the 49 climate-related shareholder resolutions followed by Ceres, at roughly the same level as in 2020 and the lowest support rate with significant margin among the top 58 managers. of assets.

The average vote on resolutions rose to 41% in 2021 from 31% in 2020, Ceres found, as giant asset managers BlackRock Inc (BLK.N) and Vanguard Group increased their support. Read more

Ceres said Dimensional was at risk of losing assets as investors invested more in funds focused on environmental, social and governance (ESG) issues. Dimensional has actually seen company-wide outflows from its funds, although analysts have cited other factors. Yet Dimensional’s ESG funds have made substantial inflows.

Many climate activists criticize Dimensional’s approach to voting, saying resolutions can spur companies to act faster.

“Dimensional must address the seriousness of the systemic risk created by climate change,” said Rob Berridge, senior director of shareholder engagement at Ceres.

PIONEERING THE STRATEGY

With $ 710 billion in assets, Dimensional has carved out a reputation on Wall Street as an influential pioneer in quantitative and value-driven investing strategies. His opposing take on climate change resolutions is standing out as more of the asset management industry pays attention to ESG issues. Read more

The Austin-based company recorded net withdrawals of $ 10.3 billion for the first 11 months of 2021 and $ 37.7 billion for all of 2020, according to Morningstar Direct.

For the past year, Dimensional said its specialty sustainability-focused U.S. funds, which have backed more of the climate resolutions followed by Ceres, had net deposits of around $ 2 billion.

Morningstar analyst Daniel Sotiroff said the cash outflows were likely due to his investment in small businesses at a time when investors were looking for gains in large-cap companies, such as Tesla Inc (TSLA.O) and Amazon.com Inc.

Dimensional’s ESG approach “fits in with its house philosophy” that, with sufficient information, efficient markets will take into account the risks companies face, Sotiroff said.

When Dimensional votes against climate-related resolutions, it is often in the minority. Last May, he voted against a proposal by ConocoPhillips (COP.N) to disclose the so-called “Scope 3” carbon emissions created when consumers burn its fuel. The resolution passed with 59% support.

Dimensional’s chief investment officer Kristin Drake said in an interview that the oil and gas exploration and production company has little control over how its fuels are used. “For them even being able to calculate their Scope 3 emissions would be really difficult,” she said.

A Conoco rep declined to comment on Dimensional’s vote or whether he could set a Scope 3 goal.

In the case of Monster Beverage Corp (MNST.O), Dimensional’s opinions won out. The firm voted in June against a proposal by the soft drink giant to offer investors an annual climate vote. Drake said the idea would isolate boards of directors from liability. At Monster, he only won 7% support.

“If the shareholders are unhappy, they should vote against the directors,” Drake said.

A Monster spokesperson declined to comment.

LESS SUPPORT FOR DIRECTORS

Dimensional has supported directors less than other large asset managers. He voted in favor of company-appointed directors only 86% of the time at U.S. shareholder meetings in 2021, compared to an average of 91% for investors his size and over, according to research firm Insightia.

Insightia also found that approximately 8% of critical votes on Dimensional’s board of directors went against directors who sit on board committees overseeing environmental or similar matters.

Since few companies have such committees, the finding suggests that Dimensional was willing to vote against directors when they saw environmental concerns, said Doug Chia, chairman of consultancy firm Soundboard Governance.

Dimensional did not provide a breakdown of how often its board’s critical votes were linked to climate change.

“We vote against directors for reasons that we believe may contribute to insufficient oversight of E&S (environmental and social) risks, such as a lack of independence, low attendance and an excessive number of boards of directors “said Drake.

Dimensional backed two of the three dissident directors who won seats at Exxon Mobil (XOM.N) last May, choosing to back candidates from hedge fund Engine No. 1, which argued the oil major was not doing enough to fight against climate change.

In addition, on April 9, Dimensional also voted against the re-election of a director of Rio Tinto Plc (RIO.L) who chairs its sustainability committee. In an email to Reuters, Dimensional said the vote was due to “lingering concerns about Rio Tinto’s oversight of significant environmental and social risks.”

Candidate Megan Clark won 74% of the vote, the lowest of all directors. Read more

A Rio Tinto spokesperson declined to comment on Dimensional’s votes.

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Reporting by Ross Kerber in Boston Editing by Greg Roumeliotis and David Gregorio

Our Standards: Thomson Reuters Trust Principles.

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