7
min read

ESG investments growing in significance

Investors expect companies to talk aboutenvironmental, social and governance issues

In the last year, ESG integration hasincreased for many large institutional investors.  Majority of assetmanagers say it played a greater role in engagement, investment decisions andproxy voting during that time.
Large institutions are growing more savvy onenvironmental issues and sustainable investing practices as they integrate theminto their decision making processes-engagement with companies to monitorsustainability progress; participation in shareholder votes about companypolicies like executive compensation packages or mergers; ownership/investmentstrategies related to climate change risks (e.g., low carbon energy assets).

Ninety-eight percent of institutional investorssay ESG opportunities and risks - excluding the impact of Covid-19 – were givenmore consideration during shareholder engagement this year compared with lastyear, according to new research from Morrow Sodali. Ninety five percent havesaid that they are taking their environmental practices into account when itcomes to making investment decisions while 85% take them into count as wellwhen voting on proxy issues.

These three big index funds can’t vote sharesfreely, but this also means that they account for 25% of the say in matterssuch as ESG integration.

The report’s authors explain that although thesefirms have been unable to sell their stocks and are restricted by votingregulations, there is still a growing need for engagement with issuers socompanies will prioritize sustainability issues like climate change or human rights.These corporations cast 3 out of 10 votes on average at S&P 500 companieswhich demonstrates just how important it has become who you elects your proxy;simply put: every voice counts!

BlackRock has been active in pushing for climatechange initiatives, such as supporting shareholder resolutions. Recently, theCEO mentioned that these types of risks are investment risk and have noted ithow they plan to address them moving forward by being more environmentallyconscious with their investments.

Larry Fink from Black Rock is aware about theimpact on environment due to global warming and addressing this concern meansinvesting less money into activities which could lead destruction or damagetowards our planet Earth’s natural assets like forests etc.,).

In the last year, more investors have started touse their voting power with index funds. These fund managers are starting tovote against directors they believe aren’t doing enough or going too slow inmaking changes that need to be made for company sustainability and growth.

Last week, shareholders at ExxonMobil andChevron voted against management’s proposals to appoint two activist investorsin the company. The proposal was met with backlash from both sides of the aislewhich is a sure sign that these companies are not doing enough for theirenvironment yet still have plenty of work left on this issue!

As research from Morrow Sodali indicates, thereare many reasons for the increased emphasis on ESG. The most popular reasoncited is pressure from clients with 97% of those surveyed either agreeing orsomewhat agreeing that this factor impacts their decision to invest insustainable companies and practices while 95% responded that they believe linksexist between financial performance and environmental, social, governancefactors (ESG). Over half of respondents also cite a need due to legislativechanges being passed which may impact ESGs as well as societal pressures suchas consumers demanding more ethical products.

The report authors have highlighted that theimpact of legislative changes and voluntary commitments can be seen from howregulators, governments, and third parties are helping shape constructive ESGengagement between companies. Legislation has been introduced at a countrylevel such as in the UK with their Stewardship Code which is being translatedinto international initiatives like Principles for Responsible Investing (PRI).

Investors expect companies to talk aboutenvironmental, social and governance issues. Morrow Sodali’s report shows that78% of investors want ESG addressed when discussing a company’s future plans insome capacity- especially when it relates to the business plan for confrontingCovid-19 pandemic. There is also an expectation that management -and sometimesdirectors – participate with shareholders on ESG conversations
There are two ways this can happen:
1) Management speaks directly during shareholdermeetings; or
2) A proxy attends annual general meeting (AGM).If managers cannot attend AGMs due time constraints then they should haveproxies present who will represent their views at these events.

There is a clear demand for board members to beinvolved in ESG engagement meetings. This shows that investors are not justlooking at the bottom line on paper, but want accountability across all threepillars of sustainability.

Analyzing the expectations of investors, it iscrucial for companies to be prepared ahead of time and not wait until they are“hit with” an engagement. Ideally, a company should have already set themselvesup for success by being in control during meetings or taking their owninitiative when necessary. If this isn’t possible due to poor preparation onbehalf of the business-owner then there’s little hope that any meeting will endsuccessfully without some thorough planning beforehand.

Investors are concerned that climate change willhave a significant negative impact on the economy. The fact that 85% ofinvestors want to engage with companies about their attitude towards this issueshows how serious it is, and demands immediate attention from both governmentofficials as well as corporate leaders who can make or break our future inthese next few years if they don’t take action now.

The board is crucial to the company, and theyneed to take ownership of ESG issues. The investment community expects boardsnot only address risks but also demonstrate their stewardship in fosteringvalue creation for stakeholders.

Gautam Bakshi

Head of Product & Engineering

Former: MD - Private Markets, Wealth & Asset Management, Manulife. Education: Ryerson University, Seneca College

Reach out and let's discuss how we can help!

preview of 15rock's client screen