ESG integration continues to rise at large asset managers, with the vast majority saying it played a greater role in engagement, proxy voting and investment decisions during the last year.
Ninety-eight percent of institutional investors say ESG opportunities and risks – excluding the impact of Covid-19 – were given more consideration during shareholder engagement this year compared with last year, according to new research from Morrow Sodali. Ninety-five percent say ESG played a greater role in investment decisions, while 85 percent say they were taking ESG into account more often when voting the proxy.
The report authors explain that while index funds like BlackRock, Vanguard and State Street Global Advisors are unable to sell shares freely, they have recognized the growing importance of engagement and proxy voting to drive ESG integration from issuers. This is notable, the report authors write, because those three firms cast 25 percent of the vote, on average, at S&P 500 firms.
Over the past two years, BlackRock CEO Larry Fink has mentioned climate change in his annual letter to investors, noting that climate risk is investment risk. Accordingly, BlackRock has been supporting investor resolutions related to climate change and ESG at AGMs in 2020.
‘The level of voting dissent is on the rise with investors such as index funds increasingly putting ‘their mouth where their money is’ and voting against the election of directors where they believe the pace of change is not sufficient or too slow,’ notes the report.
Just this week, shareholders at ExxonMobil and Chevron voted against management on a number of proposals, most notably appointing two activist investors at ExxonMobil and lobbying both companies to provide climate-related accounting.
Investors and legislation seen as driving increased focus
There are several reasons for the increased emphasis on ESG, according to Morrow Sodali’s research. The most popular reason is pressure from clients, with 97 percent of respondents either strongly agreeing or somewhat agreeing that this pressure is a driver. This is closely followed by recognition of links between financial performance and ESG performance, with 95 percent of respondents either strongly agreeing or somewhat agreeing that there are links. Eighty-eight percent of respondents cite legislative changes, while 86 percent cite societal pressure.
‘The impact of legislative changes and voluntary commitments can also be seen from how regulators, governments and third parties are helping shape and promote constructive ESG engagement between companies and their shareholders, from the introduction of stewardship codes at a country level – such as the UK Stewardship Code – to international initiatives such as the Principles for Responsible Investing and the TCFD,’ write the report authors.
Investors expect companies to discuss ESG when talking about a company’s future plans. Morrow Sodali’s report shows that 78 percent of investors want to discuss ESG when talking about a company’s future, especially when it relates to the business plan to confront the Covid-19 pandemic. There is also an expectation that management, and in some cases directors, participate in shareholder engagement on ESG.
‘The request for director participation in engagement meetings underscores the fact that investors hold the board responsible for risk management and accountable across all three of the ESG pillars,’ the report authors note.
‘From anecdotal feedback gathered during the survey, investors expect the company to be in control of the engagement agenda and have a clear understanding of the issues they are facing and how they are managing them, with clear board oversight. A failed engagement is considered one where companies have not prepared and, rather, sit back and wait for investors to lead the discussion.’
Climate still top issue for ESG-related investor engagement
The number-one issue on which investors want to engage with companies remains the climate, according to 85 percent of investors. They also expect asset managers to view climate change as having a material effect on their investment portfolios and to have robust disclosure and a plan to transition to net-zero.
‘The focus on boards and their effectiveness reinforces investors’ views that ownership of ESG issues starts with the board,’ states the report. ‘Boards are expected to demonstrate their stewardship and how they are undertaking risk management and fostering value creation.’
A total of 42 global institutional investors managing $29 tn in assets participated in a survey for the report. Responses were gathered through direct conversations or an online survey, according to Morrow Sodali.