Institutional investors wary of companies' ESG promises

Institutional investors are increasingly wary of the ESG promises being leveled by firms, with 86% of US investors saying they think companies “overstate or exaggerate” their ESG progress.

Another 72% of investors internationally say they don’t believe companies will achieve their stated ESG commitments, according to new research from Edelman. A whopping 94% of US investors say they expect companies to establish and communicate a net zero climate plan, but 92% also expressed concern that companies aren’t effectively executing on those promises.

The firm’s fifth annual Trust Barometer Special Report: Institutional Investors surveyed 700 such investors across seven markets this fall and notes that investors are “skeptical” of ESG disclosures and commitments, with 87% of respondents saying they anticipate more litigation as a result of firms failing to deliver on their ESG promises.

“Investor priorities and expectations are changing rapidly and companies that do not keep up will struggle to win trust,” said Lex Suvanto, managing partner and CEO of Edelman Financial Communications. “Our research reveals that investors do not trust company ESG disclosures and do not trust companies to deliver on ESG promises. At the same time, investors now see employee activism as a sign of a healthy corporate culture. These are disruptive forces across the investment community that corporate boards and leaders must embrace to ensure competitive cost of capital and fair valuations.”

ESG has been a hot topic in CRE and investment circles, and is expected to play an even larger role in the sector in 2022. Last year, mutual funds and EFTs invested $288 billion globally in sustainable assets from January through November 2020, a 96% increase over 2019 numbers, and that corporate net-zero pledges increased three-fold from 2019 to 2020.

“We have absolutely seen an increase in commitments over the course of 2020. The number of corporations that committed to science-based-targets, for example, equaled the previous five years combined and the fund flows into US ESG funds, according to Morningstar eclipsed $50 billion, up from $21 billion in 2019,” says Lori Mabardi, senior director of ESGR research at JLL. “The global conversation around the need and urgency to shift from a shareholder economy to a stakeholder economy has been underway for some years but reached a new apex in 2020.”

Investors are also upping the ante on due diligence around ESG matters.

“We have seen an exponential increase in the number of potential and current investors who are asking questions about sustainability, as well as in the level of detail requested,” Elena Alschuler, Americas head of Sustainability at LaSalle Investment Management, says. “It’s no longer enough to show investors our ESG policy and list of green certified buildings. Now investors are asking LaSalle to explain our goals, progress metrics and data validation processes; how we incorporate sustainability into our investment process and asset operations; and our internal governance and accountability structure for these activities. We are also getting more questions about climate risk and resilience, and our investment and tenant screening policy.”

Earlier this year, CBRE CEO Chuck Leitner made headlines when he referred to ESG commitments as “table stakes,” saying delivering on those promises starts with making quantifiable commitments to an objective and expressing concrete steps to getting there. 

“It takes a lot of bravery to put a number out there and also be able to explain why you’re not there or why you may never get there to an absolute net zero situation,” Leitner said. “We need to manage ourselves to those numbers, and we need to learn how to explain how we’re progressing against those goals.” Otherwise, “you’re just not going to be in the conversation if you don’t do that.”