Helio Beltrão: Authorities frame funds for using ESG practices

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ESG in real life is in trouble. Attorneys general in 19 US states last month sent a letter to BlackRock CEO Larry Fink warning of apparent violations of the basic investment law, which requires managers to act solely to maximize financial returns to investors. , not to promote social or political goals, however relevant they may seem. “Our states will not tolerate retiree savings being sacrificed to BlackRock’s climate agenda,” the letter states.

For the first time in ten years, there is a reaction to the powerful wave of ESG, related to the fundamental question of fiduciary duty in relation to savers’ money. It may be the force that will produce a healthy balance: neither idolatry nor demonization of the ESG.

The question of fiduciary duty applied to the ESG has to do with a revolution in capitalism that began in the 1950s and is still ongoing. Peter Drucker, science guru of business management, called it “The Unseen Revolution” (“The Unseen Revolution”, 1976). Increasingly, pension funds and other institutional investors, such as fund managers and ETFs, came to control the largest listed companies. With economic growth, ownership of corporate shares has dispersed into the hands of tens of millions of individual savers, while corporate control has been concentrated in a few huge managers whose duty is to act in the best interests of savers and pensioners. .

Today, the biggest managers are of the “passive” type —neutral and agnostic in relation to the choice of companies—, who pursue benchmarks, whether stock market, sectoral or thematic indices. Together, BlackRock, Vanguard and State Street, the Big Three, manage more than $20 trillion of third-party assets, or 30 times the market value of all companies listed on the B3. The Big Three account for about a quarter of the votes at shareholders’ meetings.

The growth of the option for passive management in recent decades has undoubtedly been beneficial to savers, as management fees are much lower than those for active management. However, although the choice of companies in the portfolio is passive, managers vote at meetings, not always according to the interests of the saver. Larry Fink does not act entirely as a passive manager, as he exercises control over votes to push his own agenda on a range of issues, including global warming and gender diversity on the board of directors.

It’s a classic case of the so-called “principal agent problem”. In the past, the saver (“principal”) invested directly on the stock exchange, but now invests through intermediaries (“agents”), fund managers and ETFs such as the Big Three. The interest of intermediaries may not be the same as that of savers.

The Big Three, which influence almost all Brazilian public companies, are accused of promoting business guidelines aimed at increasing the volume of managed resources, disregarding the will of the saver. For example, marketing aimed at millennials benefits the manager with more resources, but can worsen financial returns. If the marketing and votes cast are not based on rigorous empirical studies that demonstrate increased financial returns, the fiduciary duty will be breached, with severe legal consequences for managers.

US officials have already realized that the managers’ fees party, driven by the progressive wave, does not guarantee the best returns for their clients. There, responsibility for other people’s money is a serious matter and has come to justice.

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