Spotlight on environmental, social and governance (ESG) investments and investing

In 2018, ethical and sustainable investing assets topped $31tn, up by more than 30% since 2016. And according to State Street Global Advisors, a leading ESG-focused fund manager (founded in the US around 40 years ago), ESG criteria are now a component of investment strategies for four-fifths of global institutional investors.

There is a growing realisation by investors that the negative impacts on the environment and society of an organisation’s activities may outweigh the benefits of the goods and services that it provides. The management of public companies and the investment priorities for asset managers have become a ‘first order question in corporate governance across the developed world’. In other words, ESG is going mainstream.

With this, and our growing role in advising clients on the structure and reporting of their sustainability programmes, in mind, Luminous recently attended a conference co-organised by New York University Law School, the European Corporate Governance Institute and The British Academy hosted at, and in partnership with, the University of Oxford’s Saïd Business School. The conference focused on ‘Investors, Firms and ESG’ issues and used the recently published ‘Reforming Business for the 21st Century – a Framework for the Future of the Corporation’ as a reference point.

Below are some of the key themes from the conference along with the Luminous outlook on them:

Key themes within ESG discussions are evolving

  • Institutional investors have an increasingly diverse range of material topics across the ESG spectrum on which they are interested in engaging with companies. But key subject areas differ widely between investors, which makes it challenging for some corporates to respond with a good narrative
  • Climate change – recent focus on climate change and carbon reduction has been universal, but it is not the only game in town
  • Gender diversity – equality, diversity and inclusivity issues across an organisation’s whole spectrum of employees, not just the board, is an area coming under greater scrutiny by asset owners and fund managers.

The mainstream investment community is changing

  • Their impact on society is moving much more to the centre of corporates’ strategies. Many forces are contributing to this e.g. the UN Sustainable Development Goals, and consumer awareness and sentiment
  • Asset owners are sometimes ‘missing in action’ insofar as they do not engage, or have time to engage, in their investments. This is not an easy task if you are a portfolio manager with hundreds of listed companies in your fund, but passive engagement is no longer sufficient
  • Voting down a shareholder resolution or resolutions does not count as ‘engagement’. Engagement has to incorporate action – meeting key stakeholders within a business and asking the challenging questions, for example
  • At present there appears to be little collaboration within the investment industry to simplify interrogating corporates. The diversity of approaches they receive simply induces ‘questionnaire fatigue’ among investor relations and sustainability teams.

Is ESG missing an ‘e’ (for employees)?

  • The institutional investor view is that exploiting employees (and communities and the environment at large) is no longer sustainable, nor desirable
  • Human capital is at risk – some organisations are not focusing adequately on employee engagement. An organisation’s success is built on motivated, engaged employees so time spent properly creating such documents as an employee value proposition will pay dividends
  • Millennials are drawn to purpose-driven organisations, rather than out-and-out for-profit corporations. Employers need to reappraise their purpose beyond the sole pursuit of profit if they are to attract and retain the best talent
  • In-work poverty is a daily reality in some sectors. How can a business create a culture of excellence and drive value for shareholders when its employees’ find their own financial stability is in crisis?

All of this begs the question, does the key principle of fiduciary responsibility for asset owners need to be redefined? In light of the evolution of the purpose debate and why publicly-listed companies exist, this is entirely reasonable. Money talks, but the focus on ESG issues is prompting more questions than just the outflow of returns to investors.

In his closing address at the conference, Professor Colin Mayer, Academic Lead, Future of the Corporation Programme, based at the Saïd Business School, noted that, ‘it’s not the law that’s preventing companies from becoming purposeful companies, but perhaps the investment landscape as a whole’. The fundamental issue is whether shareholders will accept the responsibility and opportunity to be more than just owners, i.e. take on a role of stewardship to help companies put purpose first.

The Luminous view

ESG integration into investment thinking has gone mainstream – returns will be better, and the volatility of such investments will be less. Corporate governance (the ‘G’ in ESG) sits at the intersection of law, politics and finance and in due course, markets and stock exchanges will determine the required set of disclosure requirements that are acceptable without overburdening organisations. Impact investing is happening here and now amongst the mainstream players – portfolio managers and the publicly listed companies they engage with will need to continue to raise their game if demonstrable changes are to take place at scale.

If you would like to know more about how your organisation can best present how it addresses and manages its ESG issues, please get in touch.

Our next #illumination event will explore more about integrating sustainability within organisations and we’ll share some practical examples. If you would like to attend, please click here to register your interest.