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Dec 21, 2015

Shareholder proposals to highlight ESG and proxy access in 2016

Uncertain risk outlook and rising interest rates to help shape investment strategies, Hermes says in 2016 outlook

Proxy access will remain on the cards in the US while increasing awareness of climate change, diversity and other ESG issues will help determine the focus of shareholder proposals and relations with companies in 2016, Hermes Investment Management predicts.

‘In 2015 we saw a record number of shareholder proposals regarding environmental issues and this is likely to continue in 2016, particularly in the US,’ says Colin Melvin, CEO of Hermes Equity Ownership Services, in the firm’s 2016 outlook. ‘Businesses are also facing further pressure to address social issues. In particular, human and labor rights will be in the spotlight.’

Melvin says proxy access will continue to dominate talks between shareholders and companies in the US through 2016, more countries will launch stewardship codes and ‘awareness of the materiality of governance issues among shareholders will continue to grow’.

Overall, tightening monetary policy, a turbulent geopolitical scene and climate change will increasingly affect the strategies and thinking of investors in 2016, Hermes says.

‘As the tide recedes on market risk, sharp rocks are slowly being revealed,’ writes Eoin Murray, Hermes’ investment office chief, in the firm’s 2016 market outlook. ‘It will be possible to navigate around them, but only with careful portfolio management. Risk of contagion is on the rise and portfolios may appear more diversified than they actually are.’

In the realm of market risk, Murray predicts more severe spikes in volatility in 2016 after an already volatile 2015, a ‘very real’ chance that risks could increase in all asset classes at the same time and a continuation of high liquidity risks.

Equities markets will also remain volatile in the coming year, with attention focused on the end of near-zero interest rates in the US and ‒ possibly ‒ other areas as well, predicts Andrew Parry, Hermes’ head of equities.

‘Market behavior is still worryingly dependent on the latest utterance from the Fed, Bank of England or Bank of Japan, something that appears unlikely to cease anytime soon,’ he writes. ‘While the markets are focused on the normalization of interest rates, next year could well see the Fed return to the unconventional, with uncertain consequences for asset prices.’