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Feb 12, 2019

Investors want more ESG information from companies

Firms must increase their focus on ESG, culture, engagement and reporting

Institutional Investors continue to want more information from companies about board composition and business strategy and how these relate to ESG issues, according to Morrow Sodali’s annual Institutional Investor Survey.

Summing up the survey’s findings, Morrow Sodali chairman John Wilcox tells IR Magazine that not only must companies meet governance and compensation best practice standards set by proxy advisers but they must also focus on four areas.

‘One, address specific environmental and social issues and explain how they handle them in terms of their business strategy and performance goals,’ Wilcox explains. ‘Two, address big-picture topics such as corporate culture, corporate purpose and reputation risk. Three, make their board members available to engage with investors and four, streamline their corporate reporting to tell a convincing story to investors.’

In this way, investors will increase their focus on board composition and accountability and companies can expect more focus on disclosure and increased dialogue around climate change strategy – which is identified as the ‘leading sustainability risk factor’.

A whopping 87 percent of respondents indicate that ‘proactive and regular engagement with the board of directors’ helps in their evaluation of a company’s culture, purpose and reputational risk.

Executive pay will also shift from an investor-specific issue and instead come up more through collective engagement efforts in 2019, the survey finds, with 67 percent of investors ranking compensation as the most important issue in their engagement with other investors.

Survey respondents also indicate that:

  • The quality of governance policies and practices still plays a pivotal role when investors make voting decisions
  • Investors are concerned that quarterly reporting can promote short-term behavior by companies and investors, and – moreover – that quarterly reporting can lead to excessive reliance on earnings guidance
  • Executive pay may be the subject of collective engagement efforts by institutions during the AGM season
  • Activist campaigns with a credible story focused on long-term strategy are likely to gain investor support when companies have an unclear business strategy.

The report notes: ‘The good news for companies is that these survey results confirm a continuation of many investors’ move away from reductive box-ticking and compliance checklists. Our more recent experience suggests some investors have indeed progressed their approach – for example, to be willing to nuance their voting decisions based on information gained via engagements.’

At the same time, however, a more rigid adherence to stated policies persists with others. ‘Some investors are willing to give companies greater flexibility to explain policies in terms of their specific business conditions and strategic goals,’ the report continues. ‘But a deeper dive into companies’ strategic decisions increases demands on the time and attention of directors, requires much greater transparency and strains the limitations of regulated disclosure.’

Wilcox adds: ‘The bottom line for companies is that they must work harder than ever to manage their relations with shareholders. The challenges around the annual meeting grow more demanding every year.’ 

The Morrow Sodali survey, the fourth of its kind, was conducted in December 2018 with 46 global institutional investors that collectively have $33 tn in assets under management.