How can investors help prevent corporate policy capture?
This project aims to make corporate political capture a central component of investors’ approach to ESG stewardship and integration. It leverages information on the state of play for key sectors and shares lessons learned from past investor engagements, including a 12-step process for ESG investors to address negative corporate lobbying.
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OVERVIEW
This report results from a research and engagement project aiming to make corporate political capture a key focus of investors’ stewardship activities. Using a series of interviews, events and through the compilation of an asset manager report card, the project engaged various members of the global investment to leverage information regarding how key sectors were performing in corporate lobbying and what lessons could be learned from past investor engagements.
Starting from a description of the pervasive issues caused by corporate policy capture, the report discusses how powerful private lobbies undermine efforts across Environmental, Social and Governance (ESG) investment, climate change and public policy. It notes that there are no established methods for asset manager engagement on corporate lobbying outside the meaningful work undertaken via the Principles for Responsible Investment’s Inevitable Policy Response work stream, the Climate Action 100+ group and the US-based Corporate Lobbying Transparency Campaign.
The risks of corporate lobbying practices in regards to industry (reputation, stakeholder relationships, ESG ratings), systems-level risks (financial integrity, civil society functions, long-term beneficiaries), reputational risks for asset managers and business risks due to political instability are raised in turn. The report then proceeds to lay out 12 steps for ESG investors to address negative corporate lobbying and policy capture. This includes support for better data through enforcing systematic disclosure on lobbying activities as directed towards concentrated sectors and publicly advocating for disclosure on political spending. The importance of changing behaviours is also discussed, noting that the development of a shared set of investor expectations regarding corporate lobbying would be useful, alongside better engagement with portfolio companies, appropriate revisions to ESG screens and the incorporation of lobbying questions into stewardship activities is detailed.
The report also emphasises the need to make compelling arguments and reframe systemic debates by enforcing why corporate capture matters and why the precautionary principles ought to be centred in financial regulation. Accordingly, action points for different stakeholders in the institutional investment chain are offered. These discussions lead to the asset manager report card, in which the world’s 50 largest asset managers by assets under management are rated by their performance regarding climate lobbying, policies integrating lobbying as an engagement issue, and the disclosure of trade association memberships.
KEY INSIGHTS
- There are persistent concerns about powerful private lobbies benefitting at the public’s expense across much of the world, as evidenced by corporate battles over access to government handouts and corruption in public procurement of medical supplies.
- Crucially, corporate policy capture often conflicts with the stated long-term environmental, social and governance (ESG) objectives of investors.
- The global asset management community is just beginning to engage public policy, legal, and stewardship teams on these issues but must now communicate expectations more clearly to counteract negative lobbying and the risk of policy capture. So far, there is no established process for asset managers to address negative corporate lobbying and influence.
- With support from institutional investors, G7 governments can lead by example and emphasise the need to reinforce anti-corruption principles and update corporate lobbying and influence rules to provide greater transparency and comparability of disclosed information.
- Better, more comprehensive, and uniform lobbying rules should level the playing field and create more transparency for all companies seeking to compete in national and global markets. In a perfect world, transparency and integrity in regulation would be the norm. But legislators and civil servants, who are the focus of much corporate influence spending and revolving door benefits, need more support to act.
- Preventable Surprises has identified 12 steps across three complementary areas of intervention for investors: better data, changing behaviours, and strengthening arguments. This list is intended to stimulate a public debate and inform structured action plans by investors and their networks.
- Investors seeking to respond to corporate capture could learn from the application of the precautionary principle, which seeks to improve decision-making under conditions of uncertainty, to environmental, human health, and financial system risks. The principle has a central place in United Nations (UN) efforts to prevent dangerous climate change but has not yet been applied in a systematic way to manage investment risks linked to policy capture and negative lobbying.
- In several jurisdictions, prudential financial regulators have adopted measures consistent with the precautionary principle to manage risks to financial system stability. In particular, prudential banking regulation and supervision are designed to increase the resilience of credit institutions and to support the stability of the financial system overall, but these aims have often been undermined by policy capture and negative corporate influence over regulatory priorities.