09 Jan PUBLIC PENSION CORNER, #26: DIMON PUTS (YOUR) MONEY WHERE HIS MOUTH IS
NEWS:
I. China Releases Climate Reporting Standards
The Chinese Ministry of Finance has released details of the country’s first corporate climate disclosure standards. The standards are, at least for now, voluntary, but they will become mandatory at some point:
According to the ministry, the new trial climate reporting standard forms part of China’s efforts to addressing climate change and accelerating its comprehensive green economic and social development transformation, by providing a key mechanism to enable green and low-carbon development, as well as to solve greenwashing problems through the standardization of information disclosure, and support the guidance of capital flows to low-carbon projects.
The ministry added that the guidelines will “establish a transparent, comparable, and reliable climate information disclosure system, strengthen the supply of standards to support green and low-carbon development, help guide market expectations, regulate corporate behavior, and scientifically assess the progress of transformation, and provide key policy tools and institutional infrastructure for transforming the “dual carbon” target from a national macro strategy to corporate micro actions.”
In addition to supporting China’s green development, the ministry also noted the need for deep alignment with international rules, with the new standard designed to “structurally converge” with the IFRS Foundation’s International Sustainability Standards Board’s (ISSB) sustainability reporting standards, but with some China-specific adaptations.
II. ESG’s Global Run Continues
The American experience with ESG remains notably different from the global experience. While those advocating the politicization of capital markets at home are in retreat, they are, nevertheless, doing quite well abroad:
Environmental, social and governance exchange-traded funds reached a new milestone, with global assets climbing to $799 billion through the end of November, according to ETFGI data. The category pulled in $5.7 billion in November alone, bringing year-to-date inflows to almost $49 billion, a 25% increase over the prior year. But it also comes at a pivotal time, as asset managers continue to downplay ESG labels and critics on Capitol Hill have accused fund managers of everything from political bias to regulatory overreach….
Last year’s sales tally ranked sixth-highest on record, though it trailed years during ESG’s heyday: Inflows peaked at $147 billion in 2021. Broad strategies attracted the bulk of assets, but investors also directed money toward clean energy, green bonds and transition-focused funds.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Dimon Puts (Your) Money Where His Mouth Is”
I hope Jamie Dimon knows what he is doing. At this point, I have to give him the benefit of the doubt, I suppose, but I’m not entirely convinced. Many of you should hope he knows what he is doing as well.
By way of background, Dimon hates the proxy advisory services, Institutional Shareholder Services (ISS) and Glass Lewis. He thinks they exert “undue influence” on proxy voting, and he’s railed against them for years. Last spring, he became so agitated while discussing the proxy advisors that he said anyone who gives them any money should be ashamed and that the firms should, in fact, “be gone and dead and done with.”
Well, now Dimon is putting his – and his clients’ – money where his mouth is:
JPMorgan Chase’s asset-management unit is cutting all ties with proxy-advisory firms effective immediately, amping up the pressure on an industry that recently has come into the Trump administration’s crosshairs.
The unit, among the world’s largest investment firms with more than $7 trillion in client assets, has to vote shares in thousands of companies. This coming proxy season, it will start using an internal artificial-intelligence-powered platform it is calling Proxy IQ to assist on U.S. company votes, according to a memo seen by The Wall Street Journal.
The bank will use the platform to manage the votes and the AI also will analyze data from more than 3,000 annual company meetings and provide recommendations to the portfolio managers, the memo said, replacing the typical roles of proxy advisers.
Like many ESG skeptics (opponents, haters, whatever), I too have long had my problems with the proxy advisory services, and I too have long lamented their “undue influence.” That said, fiduciaries should, I think, view this decision with caution, at the very least.
For starters, it’s worth remembering that Jamie Dimon’s reasons for opposing the proxy advisory services are not the same as the ESG skeptic’s reasons for doing so. He rarely gets into the details of his opposition, and when he does, it’s usually vague. Proxy advisory services are responsible for a drop in IPO’s, he says. And they routinely pressure companies to separate the CEO and chairman of the board roles. And…well…they’re conflicted. None of this is new, of course, and some of it is personal. (Dimon is, after all, both the CEO and the chairman of the board of JPMorgan Chase). In any case, whereas some of us are dubious of the proxy advisory services because they have institutional biases that affect their recommendations, Dimon has his own reasons for finding them problematic. And that is reason enough to view JP Morgan’s decision with caution.
A second reason to be leery, however, is the system that will replace ISS and Glass Lewis at Dimon’s firm. I’m not naïve enough to suppose that when JPMorgan says its new platform will be powered by AI that that means its stewardship team will be plugging its data into ChatGPT or some other commercially available Large Language Model. Presumably, a firm with nearly $200 billion in annual revenue has spent considerable time and money developing a tool tailored to its specific needs. At the same time, however, nor am I foolish enough to assume that JPMorgan’s AI model will be foolproof or unbiased. Indeed, as every schoolboy knows, AI models reflect the biases of their creators. And the ultimate “creator” here – Dimon himself – was infamously the chairman of the Business Roundtable when it advanced its “stakeholder-friendly” redefinition of the purpose of a corporation and, thereby, helped launch ESG into the investing mainstream.
To that end, I should note here that JPMorgan AM is one of the asset managers of record for more than a few public pension funds – including many state pension funds – that might object to the use of an AI model in making proxy voting decisions, especially if that model harnesses Jamie Dimon’s biases and those of the rest of the stakeholder advocates from the BRT. According to the good folks at Ballotpedia, at least one state pension fund in 28 states uses JPMorgan as an asset manager. And this list includes a great many Red States. Although data for other public pensions have not been compiled, it’s a pretty safe assumption that JPMorgan AM is also involved with a considerable number of counties, municipalities, etc. At the very least, this should prompt a review of priorities with the pension plan’s asset manager, as well as ongoing close inspection of future AI-assisted proxy votes.
A final reason for caution here is that no one can say for certain what impact all of this will have on the practice of proxy voting or the role of proxy advisors. In the best-case scenario, JPMorgan’s announcement will accelerate the adoption of custom voting guidelines by the advisors and their clients. As I have noted before in these pages, I suspect that’s the likely future direction of the business anyway, and this may just speed up that process.
That said, there’s no guarantee that this will be the case. Presumably, other large asset managers will follow suit and will develop their own proxy voting platforms. That will, in turn, require them to hire significant staff to handle the due diligence or to adopt an AI approach as well. Either way, each firm’s own biases will play a role in its future decisions. And with some firms, those biases could be significant and even more stakeholder-centric than those of ISS and Glass Lewis.
Moreover, one presumes that some smaller asset managers will be tempted to develop their own AI platforms but, lacking JPMorgan’s resources, may develop something inherently less reliable. That would be a potentially disastrous development in itself, but it could also aggravate current negative trends in asset management. It is hardly unreasonable for one to conclude that all of this might, in the end, serve to exacerbate the concentration of capital in the hands of a few, large asset managers. If their resources allow them to engage in due diligence strategies that are significantly better than or completely unavailable to their smaller competitors, then they will gain yet another massive competitive advantage.
The bottom line here is that Jamie Dimon and JPMorgan are leading us into unexplored territory. While it is fair and understandable to view this journey with interest and anticipation, it is also wise to be cautious.
Again, we should all hope Dimon knows what he’s doing.
