Institutional investors report ESG factors increasingly affect investment decisions
And they're looking at not just ESG reporting standards but management and board behavior to determine ESG performance.
As the world reacts in shock and fear to the risk of a coronavirus pandemic, ESG investors attend to the underlying, end-all, be-all risk — climate change. And three important findings from a recent survey of institutional ESG investors deserve calling out: The first is that ESG investing is increasing and has “risen significantly.” The second is that more and more institutional investors are engaging in it.
And the third is that ESG performance needs to be more accurately communicated, not just by adhering to one of several accepted standards for communicating that performance, but also by the behavior of management and the company board, which investors see as an indication of whether a company walks its talk.
That’s according to Morrow Sodali’s 5th Annual Institutional Investor Survey from January 2020 of 41 global institutional investors, managing a combined USD $26 trillion in assets under management.
“2019 marked a turning point in incorporating ESG factors into mainstream investing as investors recognize the growing risks of non-financial factors,” the survey notes. The main growing risk, not surprisingly, was climate change — the driving interest of ESG investors.
As many government and business organizations have warned (including such diverse pairs as the Federal Reserve and the U.S. Dept. of Defense), climate change poses business, economic, societal, and national security risks.
That doesn’t mean ESG investors cared only about monitoring energy, oil, and industrial companies. ESG investing goes far beyond that, as investors are questioning and monitoring environmental policies and processes of all companies, “[a]lthough … different companies will be affected by climate change in different ways,” the survey acknowledges.
Greenwashing, a practice in which companies falsely portray their products, processes, and policies as being environmentally friendly, is a no-go for ESG investors.“Overwhelmingly 91% of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures,” the survey notes.
And yet, the survey authors say, “there remains plenty of work to be done for companies on how best to report and manage environmental and social issues.”
Several standards exist for companies to use to show ESG performance. Investors in the survey recommended two standards by overwhelming numbers as the best to use to communicate company ESG information: SASB (81%) and TCFD (77%).
But the bottom line, the survey authors conclude, is “Investors are sending a very clear message that it is not what a company says on paper, but rather how its top representatives communicate their purpose and culture that sets the ‘tone at the top’ and filters through all levels of the organization.”
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