A framework for responsible investment, with a particular focus on proxy voting

Thesis

Shareholders and stakeholders differ in their responses to environmental, social and governance (ESG) issues. Even amongst shareholders there is wide variation, prompting the question asked here—do investors optimize both financial returns and ESG outcomes? To answer, the thesis examines support for shareholder ESG proposals using a mixed methods approach. Significant differences are found by investor type, size, and geography, and according to the financial materiality of the proposal. A new benchmark for proxy voting is developed with practical application to maximize the common ground on ESG issues between shareholders and stakeholders.

The voting data are novel and comprehensive. Bayesian modelling results are strengthened by an extra step linking voting data to the locus of decision making, including for parent-subsidiary relationships and mutual fund brands. Expert interviews helped interpretation of the results.

The first research chapter tests voting by investor type (asset owner, active manager, passive manager) and finds asset owners (pension funds) optimize both financial and ESG outcomes. However, geographical bias in their voting is found at both the US state and country level, reported in chapter 5. This includes a strong aversion to ESG proposals by smaller funds in US states with Republican administrations. Drawing distinction between shareholder and stakeholder goals, chapter 6 reports much lower support by all investor types for proposals which are financially material; even optimal voters are cautious when money is at stake. Chapter 7 reports that investors increase support for ESG issues upon becoming signatories to the United Nations-backed Principles for Responsible Investment—an institutional vote of confidence. Each of the research chapters reveals a size effect, consistent with resource availability, organizational structure, and behavioural biases.

A ‘modern proxy theory’ is developed with pension funds as ‘price setters’ and biases incorporated as ‘factors’ to develop a global benchmark, scalable to all investors. The proxy voting benchmark promises to expedite improved ESG outcomes in two ways: highlighting where investors' proxy votes have not optimized financial and/or ESG outcomes; and as the basis of a forward-looking proxy voting index. The thesis approach and results open multiple pathways for future research and the conclusions have strong implications for stewardship and public markets.

Authors: Robertson, IM

• DOI: 10.5287/ora-4rraznkne
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: principles for Responsible Investment; financial materiality; proxy voting benchmark; proxy voting; sustainable investment; PRI; proxy voting index; modern proxy theory; SRI; responsible investment; ESG
• Subjects: Impact investing; Securities; Agency costs; Investments; Investments--Moral and ethical aspects; Index theorems; Materiality (Accounting); Portfolio management; Economic geography; Proxy advisory firms