Companies could suffer from significant shareholder rebellion this year, as index provider MSCI says investors will begin to raise questions on transparency before a scandal hits.
Matt Moscardi, MSCI’s executive director and co-author of its outlook report – ‘2019 ESG trends to watch’ – tells IR Magazine that corporate leadership will come under extra scrutiny this year as institutional investors look to take action around their shareholder rights ‘if something goes wrong at a company’.
His comments come against the backdrop of scandals in 2018 that include the arrest of Richard Liu, CEO and founder of China’s largest online retailer, JD.com.
‘If ever there was a wake-up call it was the case of [Liu],’ the MSCI report notes. ‘As he sat in jail [facing] allegations of rape on September 2, 2018, investors could choose either to ride the sharp drop in stock price or divest. Their minimal rights as shareholders precluded any resolute action.
‘And the situation was made worse as the company had not held a shareholder meeting since listing on Nasdaq in 2014, nor was it required to do so, according to its bylaws. When prosecutors ultimately chose to drop charges almost four months later, it hammered home the fact that shareholders had little recourse but to follow the company’s headlines, along with the rest of the world.’
Investors are realizing they do not have to ‘hold on to companies they can’t influence,’ Moscardi says, adding that they are increasingly looking into the relationship they have with the companies they invest in. ‘Do you know what you own? Do you know the rights you have? Do you know the implications of not having those rights?’ he asks.
The report states: ‘The age of transparency means there are fewer and fewer places for questionable corporate practices and even personal conduct to hide. As a result, 2019 may mark a turning point for investors tired of paying the cost for companies slow to adapt when the internal becomes external and the whole world can judge misconduct for itself.’
Other ESG trends to watch out for in 2019
The overarching themes for 2019 follow a clear narrative, according to the report. ‘The bull market may be ending, and everyone is bracing for the long haul,’ the report authors write. ‘For an ESG investor, the long haul has already started. Underlying many of the 2019 themes are potentially overlooked costs and opportunities, and our [trends] have one thing in common: acting today could make the difference tomorrow.’
MSCI highlights four key ESG trends in its report:
- The plastic waste trade war
‘In 2019, companies and investors are forced to contend with the new reality: waste reduction isn’t a marketing priority – it’s a business challenge. How the world addresses the disruption it creates will have ripple effects across multiple industries and countries, ripping the issue from the pages of glossy sustainability reports and thrusting it into investor presentations and financial filings as a subject of business risks and opportunities.’
- Climate risk
‘In 2019, we will see the end of the argument that time is on our side. Nowhere will it be more evident than in private assets like real estate. The US National Climate Assessment report issued in November 2018 directly linked recent extreme weather events to changes in the climate, and projects that the economic impact from climate change could be double the impact of the Great Recession. But the pinch may happen faster in some places than in others, with real estate as a prime example of an asset class that will inevitably be impacted by climate in the next decade. While private assets like real estate may be the tip of the spear, eventually all assets may have to be judged by the same question: where are the winners and losers in my portfolio?’
- Putting ESG data to work
‘In 2019, as we look out onto the next decade for ESG ratings, having more data will be the easy part. The hard part – and the important part – will be knowing how to identify and apply the most relevant signals and achieve better differentiated investment objectives.’
- Regulating the business of ESG investing
‘In 2019, the script flips, and it isn’t just companies that are fielding ESG-related disclosure requirements. Investors will see escalating demands as regulators ramp up scrutiny beyond primarily issuers to focus on the business of ESG investing.’