Taking ESG seriously
Investment stewardship – engaging with companies to pursue corporate governance practices that help promote long-term value for shareholders – has rapidly gained in profile over the past few years as a growing number of investors base their strategies around ESG.
No respondents say the investment stewardship team at their firm has decreased in size over the past five years. Overall, 81 percent say the team has increased in size over that period. That figure is slightly higher (83 percent) among portfolio managers and those on the buy side than among respondents on the sell side (75 percent).
Respondents in North America (88 percent) are more likely to report an expansion in their stewardship team than their peers in Europe (82 percent). In general, the size of those teams is reported to be between nine and 12 people.
Despite this growth, the survey finds that almost half (49 percent) of all investor respondents still do not have a stewardship team at their firm. That response is more common among portfolio managers and those on the buy side (55 percent) than among those on the sell side (38 percent). But more than a quarter (27 percent) of those on the sell side don’t know whether their company has a stewardship team, compared with just 9 percent of buy-side/portfolio manager respondents.
Similarly, more than half (52 percent) of investor respondents say their firm does not publish an annual investment stewardship report. Those in Europe (42 percent) are more likely to do so than those in North America (19 percent). Almost a third of those on the sell side do not know whether their company releases this information.
The growing role of stewardship teams is mirrored in decision-making. Overall, 84 percent of investor respondents say that during the last three years, ESG risks or opportunities have been given greater focus at their company when it comes to making investment decisions.
Eighty-seven percent of buy-side/portfolio manager respondents report this to be the case, compared with 78 percent of those on the sell side. The response is roughly the same from respondents in North America and Europe (80 percent and 84 percent, respectively).
Several buy-side/portfolio manager respondents say ESG is playing a greater role in investment decisions due to client demand.
Other reasons given include:
‘We need to save the planet’
‘So we can do more engagements with our holdings’
‘Valuation differential between traditional ESG and non-traditional ESG companies’
‘Demand from clients and regulators’
‘Increased availability of data allowing structured and transparent decision policies, industry development’
‘Reaching the investment and decision consensus that taking ESG risks into our investment decisions is within our fiduciary duty’
On the sell side, comments include:
‘Greater demand from investors and/or clients’
‘To follow the generally higher attention devoted to ESG themes’
‘Sustainability investing is a key component of our corporate strategy. There is growing client demand for sustainability investing and, more recently, growing regulatory requirements, too’
‘Integration of ESG considerations into the investment process strengthens the decisions taken’
‘To identify potential risks in relation to ESG’
US companies and investors saw record numbers of environmental and social shareholder proposals gain approval during the 2021 proxy season. There have also been record levels of support for proposals in areas such as board diversity, political contributions and plastic pollution.
Those areas of focus are reflected in the issues that have led investors to engage with issuers over the past year.
Overall, the most frequently cited are environmental issues (such as climate change, water, biodiversity, ecosystem impact), mentioned by 66 percent of investor respondents, board composition and effectiveness (56 percent), Covid-19-related impact (50 percent), supply-chain management/ issues (47 percent) and executive remuneration (45 percent).
The top 10 issues leading to engagement are rounded out by labor practices, cyber-security and data privacy, health and safety, corporate culture and employee diversity data.
Buy-side/portfolio manager respondents and respondents on the sell side report in similar numbers that specific ESG issues have prompted them to seek engagement. But those on the sell side are far more likely to have been prompted by pandemic-related issues to seek engagement (86 percent) than are buy-side/portfolio manager respondents (32 percent).
A greater percentage of sell-side respondents mention environmental issues (76 percent) than do their buy-side/portfolio manager counterparts (61 percent).
Asked what time of year they are most likely to seek information or ask questions on specific ESG questions, at least a plurality and often a majority of investors say ‘generally across the year’. This tends to underline the importance of year-round engagement programs by companies, something they are increasingly adopting.
There is a slightly different pattern with some topics, however. Almost a third (32 percent) of investor respondents say they are most likely to seek information on board composition and effectiveness between April and June while half say they do so across the year. Forty-one percent say they look into executive remuneration between April and June.
Professionals tend to agree that an effective shareholder engagement program needs input, at least to some degree, from a variety of sources at a company. This includes the governance team, IROs, the C-suite and the board. Investors were asked to rate the knowledgeability of these groups on specific ESG topics using a scale of one to five, with one being ‘not at all knowledgeable’ and five being ‘extremely knowledgeable’.
Investors rate CEOs and CFOs most highly in terms of their ESG knowledge about the impact of Covid-19, executive remuneration and racial equality, with each seeing an average score of 4.0 (very knowledgeable). The topics on which CEOs and CFOs score almost as highly are staff retention, hiring and training, corporate culture, board composition and effectiveness and supply-chain management/issues. They receive an average rating of below 3.0 – ‘somewhat knowledgeable’ – only on gender pay gaps.
Investors rate governance teams most highly for their knowledge of executive remuneration (4.1), followed by board composition and effectiveness (3.8), employee diversity data and political lobbying and spending (both 3.7), health and safety, the impact of Covid-19, environmental issues and labor practices (all at 3.6). Investors give the lowest average ratings to governance teams’ knowledge of supply-chain management/issues and talent management.
Board members score on average most strongly in terms of their knowledge of board composition and effectiveness (4.0), the impact of Covid-19 (3.9), executive remuneration and corporate culture (both 3.8) followed by health and safety, political lobbying and spending and labor practices (3.4 each). Their worst score (2.9) is given for gender pay gaps.
Investors rate the ESG-related knowledgeability of the IR officer/team most highly in terms of Covid-19 impacts (3.8), employee diversity data and executive remuneration (both 3.6), board composition and effectiveness (3.5) and labor practices (also 3.5). They give the lowest ratings in areas such as community relations (2.6), cyber-security and data privacy (2.5) and political lobbying and spending (also 2.5).
Not surprisingly, investors say the HR team/chief HR officer are most knowledgeable about staff retention, hiring and training (4.3), employee diversity data and talent management (both 3.9), corporate culture (3.8) and labor practices (also 3.8). They score on average below 3.0 in terms of areas that are traditionally at least partly outside of their field, including environmental issues (2.2), supply-chain management/issues (1.7) and cyber-security and data privacy (1.4).
Investors generally rate ESG/sustainability teams’ knowledge particularly highly on racial equality (4.7), community relations (4.6), gender pay gaps (4.5), environmental issues (4.2) and health and safety (4.0).
The Covid-19 pandemic has led to major shifts in working practices, including ESG engagement. Asked to rate which type of meeting is most useful for engaging with firms in a virtual context, 40 percent of investor respondents point to traditional non-deal roadshows, while 19 percent mention earnings calls. No other method attracts more than 9 percent support.
When it comes to in-person meetings, investors most frequently say the best means of engaging is through site visits (30 percent of respondents) followed by traditional non-deal roadshows (28 percent) and traditional investor days (12 percent).
Overall, most investors (53 percent) say their company has its own proprietary ESG methodology. Fifty-nine percent of buy side/portfolio manager respondents say this is the case, compared with 43 percent of those on the sell side.
Investor respondents were asked how much confidence they place in certain ESG data sources on a scale of zero (not at all confident) to 10 (extremely confident). Overall, they have the greatest confidence in their own firm’s proprietary ESG information (6.5 on average), followed by an issuer’s ESG information (6.0), ESG ratings agencies’ information (5.0) and alternative ESG data providers (below neutral at 4.4).
Despite a surge in support for ESG shareholder proposals in the US this proxy season, calls for say-on-climate votes did not get as much traction. But 42 percent of investor respondents are in favor of companies they invest in giving them a say on climate, including 48 percent of buy side/portfolio manager respondents.
