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Nov 19, 2020

Jump in investors that want executive pay tied to ESG

Edelman survey finds investors apply premium valuation to companies that excel in ESG initiatives

More than two thirds of investors want executive pay tied to ESG initiatives, a move that would pressure boards to achieve social and other key targets, according to the global Edelman Trust Barometer Special Report: Institutional Investors. Sixty-nine percent of stakeholders say they want to see a link between remuneration and ESG, a 17-point jump over 2019.

‘This is probably one of the biggest percentage-point jumps we have seen this year,’ said Heidi DuBois, Edelman head of ESG, as she released an analysis of the results at the Corporate Secretary Forum earlier this week.

Investors are asking about tough decisions made by companies during the pandemic  – both in terms of business operations and their employee base  – and how that’s translating into executive compensation, said Ray Cameron, head of investment stewardship at BlackRock, at the forum: ‘We want line of sight into how they are thinking about that.’

ESG performance adds premium valuation

Edelman surveyed 600 institutional investors representing $20 tn in assets under management in six global markets between September 3 and October 9. The resulting report also reveals that most investors, particularly in the US, believe ESG-excelling companies merit a premium valuation.

‘Investors strongly agree that companies with strong ESG performance deserve a premium valuation to share price – 92 percent in the US. In addition, investors believe companies that prioritize ESG initiatives represent better opportunities for long-term returns,’ DuBois said at the forum. ‘We also see pretty similar numbers globally and in the US for this perspective, so clearly ESG factors are impacting how investors perceive and evaluate the financial performance of an organization.’

Corporate responses to the Covid-19 pandemic have thrust social issues, such as employee safety, engagement and retention, into the spotlight this year. Indeed, social issues rose from third place to first in the list of investors’ ESG priorities this year, according to Edelman’s survey results.

‘While the global pandemic has forced some companies to temporarily deprioritize ESG efforts, investors clearly believe a robust ESG strategy has a positive impact on share price and resilience,’ says Lex Suvanto, Edelman’s global managing director of financial communications, in a statement. ‘Boards of directors especially must get ready for direct engagement from investors on ESG matters, including climate risk, corporate culture and diversity and inclusion.’

Diversity and inclusion

Diversity and inclusion disclosures impact investor trust and the share price, the survey finds. Overall, 92 percent either strongly agree or somewhat agree that strong diversity and inclusion (D&I) data has a positive impact on share price, and seven in 10 apply exclusionary screening criteria based on D&I data.

Meanwhile, two thirds of UK investors say their firm is actively applying exclusionary screening based on D&I metrics, while 64 percent are putting portfolio investments that don’t meet D&I metrics on their watch list. 

Shareholder activism

Shareholder activism is expected to surge as the markets recover, although many investors (85 percent) believe companies are not prepared. Investors are not waiting around, however. Of the 100 UK investors surveyed, 87 percent believe it is acceptable to launch a public activism campaign against a company in the current environment.

Within the next six months, many respondents say they are likely to increase their engagement with company boards over environment topics, including the impact of climate risk (95 percent), resource scarcity (90 percent) and the eco-efficiency of company operations (94 percent).

Almost all respondents believe businesses must lead on positive societal change: 92 percent either strongly agree (57 percent) or somewhat agree (35 percent) that corporate leaders are obliged to use their power and influence to advocate for positive social change.

Among other highlights:

  • 88 percent of those surveyed say companies that prioritize ESG initiatives represent better opportunities for long-term returns
  • 79 percent say their firm is temporarily deprioritizing ESG as an investment criteria but a large majority expect that to change when the recovery is under way
  • 97 percent of respondents strongly agree (50 percent) or somewhat agree (47 percent) that the multi-stakeholder model of governance is more conducive than other models to delivering long-term financial returns
  • 77 percent believe a high level of trust is either critically important (33 percent) or important (43 percent) for companies to manage effectively through a crisis.

The Edelman Trust Barometer Special Report: Institutional Investors surveyed 600 institutional investors including financial analysts (39 percent), chief investment officers (31 percent) and portfolio managers (17 percent). One hundred professionals were surveyed in each country across the US, the UK, Canada, Germany, the Netherlands and Japan. Sixty-one percent of those polled worked for organizations with assets under management in excess of $1 bn. The report is a supplement to the Edelman Trust Barometer, released annually at the World Economic Forum.

Caroline Byrne

Caroline Byrne is an Irish-Canadian journalist who started her career in London at the Associated Press and Bloomberg. Over the last decade, she has worked both as a freelancer and staff journalist for various organizations including Euromoney , The...