Institutional Investors Highlight the Growing Importance of ESG in Investment and Proxy Voting Decisions

(Credit: Pixabay)

by | Mar 10, 2020

(Credit: Pixabay)

Institutional investors unanimously confirm that ESG (environmental, social, and governance) risks and opportunities played an increasingly important role in their investment decisions and their evaluation of portfolio companies during the past 12 months. This is according to Morrow Sodali’s annual Institutional Investor survey.

The survey highlights the main areas of focus for institutional investors in determining how to exercise their voting rights at 2020 annual shareholder meetings. Survey results reveal that the broadly defined concept of ESG will have a direct practical impact on shareholder meetings, proxy voting, engagement, and the various means by which investors fulfill their oversight and stewardship responsibilities.

Several findings stood out, including:

  • Climate change is at the top of investors’ ESG agenda. All companies, regardless of their sector, should expect increased investor scrutiny on how they approach this issue.
  • Investors expect to be privy to the inner workings of the board, underlining the importance of board/shareholder engagement.
  • In general, pay-for-performance continues to dominate as a key pressure point for investors, but increasingly the emphasis is on how companies and boards respond to shareholder concerns and negative votes.
  • Many investors express a need for more explicit non-financial information, which they see as an important indicator of underlying corporate culture, integrity, and sustainability. With regards to climate change factors, it is of primary importance to investors that companies clearly show what the connection is to their financial risks and opportunities.

The survey was conducted in January 2020. Forty-one global institutional investors with $26 trillion of assets under management in total responded to the survey.

The survey notably indicated that:

  • Investors are more likely to support activists if the company has weak governance practices, an even more important factor than the credibility of the activist’s proposed business strategy.
  • An overwhelming majority of investors expect companies to demonstrate in their reporting a link between financial risks, opportunities, and climate change, with a majority also believing that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate-related disclosures.
  • Second only to climate change, human capital management is cited by investors as an important sustainability topic that they will focus on when engaging with boards in 2020, with a specific focus on improved disclosure around board involvement in setting the corporate culture in addition to robust health and safety indicators.
  • Investors widely agree that stakeholder engagement approach and outcomes should be included in companies’ reporting, together with their explanation of corporate purpose.
  • ESG and sustainability are playing a more important role in fixed income investment decisions, with ESG rating agencies having established themselves as an essential factor in analyzing risks and opportunities, in addition to the credit rating agencies.

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