The latest example of building momentum for greater investing in companies with strong environmental, social and governance (ESG) practices was provided this week in the form of new research from Edelman.
An overwhelming majority of investors now expect companies to implement effective ESG practices, according to Edelman’s survey of 600 institutional investors in six countries (U.S., Canada, U.K., Germany, the Netherlands and Japan).
The “2019 Edelman Trust Barometer Special Report: Institutional Investors” identifies pivotal issues shaping investment criteria and how companies can build trust with the investment community. This year’s research reveals that investors believe companies must address the needs of a wide range of stakeholders, not just shareholders, and must implement effective ESG practices to win their trust.
You may remember that earlier this year, Business Roundtable, which represents many of America’s largest corporations including many prominent financial services companies, issued a statement on “The Purpose of a Corporation” that broke with its long-held mantra that corporations exist principally to serve shareholders, and therefore increasing profits matters most.
The new statement said companies must also “invest in their employees, protect the environment and deal fairly and ethically with their suppliers.” It was signed by 181 CEOs who committed to lead their companies for the benefit of allstakeholders.
The new Edelman research found 84% of investors agree maximizing shareholder returns can no longer be the primary goal of the corporation, preferring a multi-stakeholder approach. Further, 71% of investors believe companies that overemphasize shareholder return will be partially responsible for consumer or employee activism and 74% say that companies with employee activism are less attractive investments.
“We are entering a new era when ESG factors are an important investment criteria for shareholders,” said Lex Suvanto, global managing director, Financial Communications & Capital Markets at Edelman. “Investors are now acutely focused on how employees and other stakeholders can impact the valuation of companies in which they invest.”
Companies that excel in driving ESG factors, Suvanto continued, will gain a clear advantage in winning investor trust and supporting a premium valuation. “Investors believe that companies that fail to do this will be responsible for consumer or employee activism.”
In addition, Suvanto said companies must get ready for more questions and more attention from investors on ESG topics.
“A majority of investors are hiring more ESG staff and changing their voting and engaging policies to be more attentive to ESG risks. Boards of directors in particular must be ready to engage with shareholders on these topics, a clear break from the conventional approach of keeping boards of directors behind closed doors,” he said.
More from the study
- Investors are investing more in ESG-excelling companies. More than half of investors believe that ESG practices positively impact trust, with 61% having increased their investment allocation to companies that excel when it comes to ESG factors.
- Investors are changing behavior to be more attentive to ESG. 87% of respondents said that their firms have changed their voting and/or engagement policy to be more attentive to ESG risks and 56% of investors globally are hiring more ESG-focused staff.
- Social media content matters. 96% of investors use one or more social platforms on a weekly basis. When evaluating a current or prospective investment, 82% of investors consult the company’s social media channels and 79% of investors consult company executive social media channels.
“Formal commitment” to ESG still lacking
Although the aspiration to apply ESG considerations to the investment process is exceptionally high, a display of formal commitment is still lagging, according to another recent report, this one from Cerulli Associates.
By “formal commitment” they mean putting it in writing, and the Cerulli report estimates that a majority of the estimated 88% of total U.S. public market assets affiliated with a Principles for Responsible Investment (PRI) signatory demonstrate ESG capabilities on their website or elsewhere, but just 4.5% of signatory assets are described in their prospectuses as taking ESG considerations into account to inform investment decisions.
Managers in that study cited client unfamiliarity with ESG factors (26%), the perception that considering ESG issues have a negative impact on performance (25%), and difficulty defining the boundaries of ESG (25%) as major challenges to client receptivity.
“Given these challenges, many asset managers shy away from documenting that ESG factors inform investment decisions,” Michele Giuditta, director at Cerulli, said in a statement.
Advisors sense opportunity in ESG
As more investors express interest in ESG investing, some advisors sensing opportunity are taking a closer look at exchange-traded funds and mutual funds heavily invested in companies with strong ESG practices.
An article this week on MarketWatch noted that some advisors are seeking to differentiate themselves by customizing ESG portfolios to suit a client’s specific preferences based on issues they deem most important to them.
The Edelman report found 86% of investors would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.
The sector is undeniably hot this year. The MarketWatch article cites Morningstar figures showing that ESG funds raked in a record $13.5 billion of net new money from investors during the first three quarters of 2019.
Source: impact investing
