A recent survey of more than 600 institutional investors across the globe that manage $20 trillion in assets reports that 92 percent of respondents give a premium valuation to companies that excel at ESG. The 2020 Edelman Trust Barometer Special Report: Institutional Investors survey also revealed that 92 percent of respondents either strongly agree (44 percent) or somewhat agree (48 percent) that strong diversity and inclusion (D&I) data have a positive impact on share price. These survey findings and more indicate that environmental, social and governance practices will significantly influence how institutional investors engage with corporate boards in 2021.
The Edelman survey reported that 96 percent of respondents said they expect their firms to increase prioritization of ESG as they recover from the Covid-19 pandemic and 93 percent expect the companies they invest in to do the same. Respondents also considered environmental topics a high priority over the next six months with 95 percent vowing to increase engagement on climate change risk and 94 percent on the eco-efficiency of company operations. Corporate boards should take note and consider developing strategies to address shareholder activism involving these issues next year.
In a statement, Lex Suvanto, global managing director, Financial Communications for Edelman said, “Boards of Directors especially must get ready for direct engagement from investors on ESG matters, including climate risk, corporate culture and diversity and inclusion… These factors are crucial as companies build their businesses, attract talent, manage through crises and ultimately, garner investor trust. It’s very clear from this survey that ESG is at the forefront for investors and a premium is being applied to companies that do it well.”
It shouldn’t be a surprise to most directors that investors are giving more attention to ESG issues. The growing movement toward stakeholder capitalism that CEOs on the Business Roundtable signed onto in 2019 has motivated shareholders to question the actions of boards of directors more frequently. The largest institutional investors have threatened to vote against the re-election of directors who do not show adequate responsiveness to certain ESG priorities, such as supporting board diversity.
Boards should anticipate that shareholders are going to be more willing to use an activist approach to pushing companies to respond to environmental and social concerns next year. The Edelman survey reports that 93 percent of respondents said they would take a more activist approach to investing and that 85 percent felt most companies were unprepared to handle an activist campaign. That suggests that boards should begin identifying potential ESG concerns that its shareholder base may be concerned about and start discussing how they would deal with a hypothetical activist campaign involving those issues.
Additionally, the focus on ESG issues gives boards a chance to reevaluate how each of the environmental, social and governance concerns factor into its business model. Could an adjustment to the company’s handling of climate risk concerns save money over the long-term? Would a more diverse board help the company recover from the pandemic faster and more efficiently? What affect would changes in work from home and worker safety policies have on productivity and the company bottom line? Issues such as these and more need to be considered by every board of directors, so addressing them before shareholders mount activist campaigns would be a benefit to all stakeholders involved.