American shareholders often focus on using proxy voting to hold companies accountable for sustainable practices, but Europe’s mandate on ESG investing may serve as a model for U.S. regulation in the future. In particular, the European Commission is proposing that investment advisors be required to ask clients directly about their sustainability preferences and take them into account when assessing the range of financial instruments and insurance products to be recommended.
In fact, according to MSCI, regulators' focus globally has been shifting: Before 2018, regulations focused mainly on corporate issuers, but last year 80% of the more than 170 regulatory or planned quasi-regulatory measures targeted institutional investors.
Federated Vice Chairman Gordon J. Ceresino noted the stewardship team will not impose ultimatums on C-suites. “We are taking a proactive approach to ESG by using terms like improve long-term sustainability,” Ceresino said. “When companies are not responsive, you probably don’t want to invest.”
Ceresino added that Federated has not applied ESG factors to its portfolios long enough to determine resulting alpha. “The group of portoflio managers at Federated is very open minded,” he said. “You have those who will be early adopters, using ESG factors in 2019. What you hope to see is a momentum gaining inside your organization. It won’t be imposed on anybody. It will be up to each portfolio manager to test the factors and decide.”