Why Canadian funds may be more likely to back eco initiatives

Study shows that experiencing extreme weather events affects investor behaviour

Why Canadian funds may be more likely to back eco initiatives
Steve Randall

Mutual funds have a significant role to play in driving the fight against climate change, but figures show they are often reluctant to do so.

But managers that experience extreme weather events such as hurricanes hitting Canada’s Atlantic coast and wildfires and flooding, are more likely to back eco initiatives than those areas without this experience.

That’s according to research from the Rotterdam School of Management Erasmus University (RSM) in the Netherlands, which highlights a huge disconnect between actions taken by some corporations and mutual fund managers who hold significant voting power.

RSM’s Dr Guosong Xu said that climate change related proposals have increased steadily in recent years, reflecting growing investor demand for corporate accountability but frequently are poorly supported.

“According to a report by the UN, just 2.8% received enough votes to pass during stockholder meetings held from 2006 to 2020. Our study seeks to better understand why these initiatives receive such little support, and what it takes to pass them successfully,” he said.

A key part of the issue is that shareholders often do not recognise climate change as an immediate concern.

But analysing voting data and cross-matching with US hurricane locations, Xu and co-researcher Dr Eliezer Fich at Drexel University, found that those funds in hurricane-affected areas were more likely to vote for environmental proposals in the immediate aftermath of weather events, as much as 38% in some locations.

Performance impact

The downside is that the shift in voting decisions is only temporary, and the study also concluded there was a negative impact on performance when climate change proposals were agreed by shareholders, although it should be noted that ESG vs. performance is complex.

In analysing whether ESG-related proposals created value for firms, the researchers discovered that companies that approved environmental proposals also typically exhibited lower long-term stock returns and accounting underperformance.