Climate change tops institutional investors’ ESG concerns

Environmental, social and governance (ESG) factors are playing an increasingly crucial role in both investing and proxy voting decisions, according to a new survey of institutional investors.

Shareholder services firm Morrow Sodali has reported that its latest survey of 41 global institutional investors with US$26 trillion in assets under management found that ESG issues are becoming increasingly important to shareholders.

Climate change is the top ESG issue for investors, Morrow Sodali noted.

“All companies, regardless of their sector, should expect increased investor scrutiny on how they approach this issue,” the firm said.

The central demand from investors when it comes to climate change is for companies to detail the financial risks and opportunities, Morrow Sodali noted.

“An overwhelming majority of investors expect companies to demonstrate in their reporting a link between financial risks, opportunities and climate change, with a majority also believing that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate-related disclosures,” it said.

Additionally, the firm reported that many investors want “more explicit non-financial information, which they see as an important indicator of underlying corporate culture, integrity and sustainability.”

Human capital management ranked second to climate risks with investors, and will be an important shareholder engagement topic in 2020, the firm reported, “with a specific focus on improved disclosure around board involvement in setting the corporate culture in addition to robust health and safety indicators.”

The survey also found that investors are more likely to support shareholder activists “if the company has weak governance practices,” noting that this is “an even more important factor than the credibility of the activist’s proposed business strategy.”

“With ESG now firmly in the investor mainstream, we strongly believe that companies must proactively manage this at the board level, essentially as a two-way communication area with their shareholders and investors,” said Kiran Vasantham, director of investor engagement with Morrow Sodali.

“ESG is a journey, not a destination. Companies that fail to fully appreciate the need to engage risk losing touch with the expectations of their most loyal long-term providers of capital and weakening these important relationships,” Vasantham added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.