Trends from ISS’ and MSCI’s investor surveys

– Investors expect clear and detailed disclosure from companies on climate.
– When say-on-climate is on the ballot, voting expresses sentiment on adequacy of risk mitigation – but failure to mitigate could result in votes against specific directors.
– Investors continue to pour large amounts of money into sustainable investments and build out their own ESG analyses. The type of investor matters when it comes to these trends.
– Investors want to improve their own diversity but change is slow.

Last week, ISS released both the results of its annual investor benchmark survey and the results of a special investor survey just on climate. These survey results will help inform ISS about how it might change its voting policies for the 2022 proxy season. Here is an excerpt from the key findings from the climate survey:

– Climate-Related Board Accountability: A significant majority of all categories of respondents expect a company that is considered to be a strong contributor to climate change to be providing clear and detailed disclosure, such as according to the Task Force on Climate-related Financial Disclosures. A smaller majority of investor respondents support all of the criteria listed except “medium-term Scope 1 & 2 targets” and “starting to show a declining trend in absolute GHG emissions.”

Other than detailed disclosure, the other criteria that were popular among investors were demonstrating improvement in disclosure and performance, declaring a long-term ambition to be in line with Paris Agreement goals, disclosing a strategy and capital expenditure program in line with Paris goals, and showing that its corporate and trade association lobbying activities are in line with Paris goals. The comments by investors were strongly supportive of companies’ setting goals in line with the more stringent 1.5 degrees of warming limit than the “well below 2 degrees” target that was in the Paris Agreement as it was adopted in
2016.

– Climate Transition Plans – Vote Targeting: The highest numbers of both investors and non-investors who responded answered that, when a climate transition plan is on the ballot, they considered that the plan is the primary place to vote to express sentiment about the adequacy of climate risk mitigation but that escalation to votes against directors may be warranted in future years if there is multi-year dissatisfaction.

– Say on Climate Shareholder Proposal Requests: Responses to the question about when Say-on-Climate shareholder proposals requesting a regular advisory vote on a company’s climate transition plan would warrant shareholder support, the answers reflected a split in sentiment. The answer with the highest support from investors was “Always: even if the board is managing climate risk effectively, a shareholder vote tests the efficacy of the company’s approach and promotes positive dialogue between the company and its shareholders.”

However, just a little below that for investors but the most frequent response from corporate respondents was that it should be case-specific and would be warranted only when the company’s climate transition plan or reporting fell short. Fourteen percent of investor respondents answered such a proposal never warranted support and preferred voting directly against directors if the company was not adequately managing climate risk. Just over thirty percent of corporate respondents answered that a shareholder Say on Climate was never warranted because it was a matter for the company to decide.

This 55-page report from MSCI that reports how institutional investors are feeling about ESG is comprehensive. Here are five points that I pulled somewhat randomly from this survey:

1. Level of ESG Investing – Some 55% of investors with more than $200 billion said they were “significantly” increasing ESG investing, often through integration strategies. This figure rises to 90% if those making “moderate” changes are included, a profound shift in the way the largest asset owners invest.
2. Extent of ESG Analysis – Investors were asked to what extent ESG analysis and decision-making will be incorporated into their main fund by the end of 2021: 26% said it would be done completely, and 34% to a large extent. Just one investor out of 200 polled said their main fund would have no ESG element by the end of the year.
3. Type of Investor Matters – Different types of investors face varying pressures and time horizons to manage. This is reflected in their varied assessments of the top trends. Climate change/risk was cited as the top trend by 22% of public and defined-contribution pension funds, but just 4% of those at endowments or foundations. The impact of disruptive technologies such as big data and AI was cited as the top trend by 16% of sovereign wealth funds (SWFs) and 14% of insurers, but just 8% of endowments.
4. Good Social Means Good Continuity Planning – 72% indicated that they believe companies with high ESG ratings had good continuity planning during the pandemic. As a result, more investors are putting greater emphasis on the “S” (social) in ESG.
5. Own Diversity Matters – Of the 200 executives surveyed, just one said internal staff diversity was unimportant. However, improvement is slow, with 86% agreeing that “more needs to be done” or “there’s a long way to go.

This article from “The Guardian” entitled “Major UK pension funds worth nearly £900bn commit to net zero” shows that this trend is continuing…