Hear about the latest in the ESG movement.
Institutional investors are turning their backs on companies that ignore environmental, social and governance issues
For listed companies, the equivalent of this nightmare scenario is investor indifference. So-called orphan stocks languish unloved, excluded from capital and ignored by the market, left to die a slow death in an increasing spiral of anonymity.
The threat of investor indifference has become a reality in recent years, driven by the extraordinary rise of ESG investing. The tide of demand for ESG from investors is shifting to a tsunami, with tens of trillions of dollars in investment funds now earmarked solely for stocks that comply with ESG criteria. The trend has mushroomed over the past decade from modest beginnings to comprising around a third of all assets under management today – and shows no signs of slowing.
Ignore ESG, and a listed company risks being ignored by a third of global investable capital.
This mega-trend also reached the shores of the Arabian Gulf recently, when ADX, Abu Dhabi’s stock exchange, announced that it is introducing guidance for listed firms to help and encourage them to publish ESG data.
Designed to help ADX-listed companies comply with rapidly evolving ESG disclosure standards, the exchange mandates that companies submit an independent report on sustainability. ‘Companies must disclose critical environmental, sustainability and governance issues,’ its statement noted. The announcement was thin on detail, beyond saying the guidance will comprise 31 disclosure indicators, and that ADX will soon hold workshops to clarify these criteria.
Many other exchanges have taken similar steps. The World Federation of Exchanges published its ESG Guidance and Metrics in 2015. But the trend has not met with universal approval. A similar declaration by HKEX, Hong Kong’s exchange, earlier this year was greeted with resistance by the business community.
In May, HKEX proposed an obligation for listed companies to publish statements about ESG-related risks. But the Chamber of Hong Kong Listed Companies said it wants the exchange to leave disclosure to companies’ discretion, citing ‘onerous and cumbersome’ disclosure requirements. This protest is likely to fall on deaf ears when replayed to investors, which will not be sympathetic to complaints of burdensome compliance levels. Resistance to the ESG trend is bound to fail, because ESG disclosure is not a pointless tick-box exercise. It is a crucial must-have for institutional investors.
Like HKEX, the ADX has seen the writing on the wall: it understands the importance of ESG, but also understands that it is not the job of the exchange to report. That is the sole responsibility of companies.
This week, new proof arrived that investors are dead serious about ESG: MP Pension, a $20 bn Danish fund, announced it was blacklisting 10 of the world’s largest oil companies, and removing them from its portfolio. The fund concluded that these firms – including ExxonMobil, Royal Dutch Shell and Total – are carrying too much climate risk and are not being active enough in their preparation for a non-oil future.
The fund said it wanted to take responsibility for the green transition while securing long-term investment returns. Anders Schelde, CIO of MP Pension, said: ‘We do not believe this sector can deliver a return on a par with the rest of the market in the coming years.’
More action like this is inevitable: ESG compliance and data disclosure are key risk-mitigation factors for investors. As climate change, social impact and governance standards climb social and political agendas around the world, these risks are becoming ever more material.
John Bates of PineBridge Investments, an Asia-based asset manager with $97 bn under management, spoke for the industry in a recent media interview when he said: ‘Five years ago, ESG was essentially a footnote during our meetings with clients. Now, it typically forms a major segment of our meeting agendas.’
MSCI, the world’s largest provider of indices valued at more than $20 bn, sees the future as becoming increasingly ESG-focused. ESG investing is now the fastest-growing part of MSCI’s operations, and Henry Fernandez, its chairman, is on the record as saying: ‘MSCI is obsessed with becoming the world’s biggest supplier of ESG tools... there might be a point where MSCI gets defined by ESG’.
As if to prove the point, BNP Paribas announced this week that it has transformed its entire active funds range to be 100 percent sustainable: one of Europe’s largest financial institutions is now an ESG-only investor.
The momentum seems unstoppable, and the growing importance of ESG to investment decisions is uniform across developed and emerging markets: demand for corporate responsibility and disclosure is a global requirement for investors in emerging markets and developed markets in equal measure.
Companies are facing a pincer movement from both the platforms they are listed on and the investors they want to attract, and non-compliance is looking increasingly like a non-starter. But ESG compliance is not simple. In spite of the proliferation of consultants, experts and service providers, there is no single authority, no benchmark, no industry standard. Google the phrase ESG and you are offered more than 40 mn websites.
Whether UAE companies choose to do more about ESG disclosure because of the latest move from ADX, or they do so because their investors demand it, the outcome will be the same. ESG’s position as a central element of any company’s investment case is the new normal.
ADX is to be congratulated for trying to get its companies to understand and embrace this fact. With or without its help, however, companies face a future where they will have to embed ESG in their narratives, or face the capitalism equivalent of Oscar Wilde’s nightmare vision: investor indifference.
Or, as the Danish pension fund has shown this week, investors may not stop at indifference – they may move to blacklisting.
(Oliver Schutzmann is CEO of Iridium Advisors)
NN Investment says 86 percent say energy transition from fossil fuels to renewables has potential to drive investment returns
With ESG issues the central financial zeitgeist of the age, a new report reveals that investors focus less on social and governance investment themes than on environmental opportunities.
The new survey – Investor Sentiment: Responsible Investing – undertaken by Dutch asset manager NN Investment Partners, investigates which ESG factors investors believe to have the most potential to drive returns.
The results show that while two thirds (66 percent) of professional investors see the greatest potential in environmental factors when it comes to generating returns, governance (40 percent) and especially social factors (15 percent) lie far behind.
So are investors that fail to look beyond the E of ESG missing out on attractive investment opportunities? The results of the survey clearly illustrate how investors gravitate toward the E, with 87 percent saying that energy transition from traditional fossil fuels to renewables has considerable potential to drive investment returns, followed by climate change (81 percent) and pollution (78 percent).
But there are significant differences between countries: French investors’ scores reveal far more balanced views. Their score for E – 52 percent – is actually lower than for G (56 percent), while their S score (35 percent) is much higher than the average.
This in turn presents a big dilemma for IR professionals: should they focus on what investors find appealing, or present a company narrative in the broadest sense, ESG or otherwise?
Addressing this issue, Adrie Heinsbroek, principal for responsible investment at NN Investment Partners, tells IR Magazine: ‘It is important to emphasize that while investors’ perception is that the E-factor adds most to creating value, NN Investment Partners finds that all three factors have to be taken into account when it comes to investment analysis.
‘We believe it should go without saying that all three factors should be given equal attention. The perception of the investors in our research is not in line with reality, as value creation is based on all three axes of E, S and G. We should bring this to the forefront and put emphasis on the financially material ESG factors.’
Heinsbroek says it is interesting that opinions differ sharply from one country to another: ‘For example, Dutch professional investors focus so heavily on the environmental factor and so little on social aspects when it comes to return potential.
‘Currently environmental issues are high on the political and economic agenda as there is a clear correlation with returns, so it is not really surprising that investors tend to focus more on the E of ESG. Climate change, pollution and global warming are prominent issues and positive impact is, for example, more quantifiable and easier to report on in terms of reduced CO₂ emissions or waste.
‘But from a portfolio diversification perspective, it is important to also look at social and governance factors as these criteria can also help pinpoint plenty of opportunities.’
Governance, for example, is a highly significant factor in corporate risk assessment and management quality had already formed a key pillar of risk analysis in the days before the responsible investing era.
In the period 2008-2019, NN Investment Partners analyzed 53 Asian corporate bond issuers that defaulted using information from a range of sources, including credit rating agency reports, news articles and analysts’ research.
The results show that 20 out of the 53 issuers (38 percent) had issues that were related to poor corporate governance, demonstrating the importance of not overlooking the governance factor in assessing the potential risk associated with potential investment opportunities.
Heinsbroek adds: ‘Our own analysis shows the range of companies that score well on ESG criteria globally is bigger and much more diverse than many might think. We believe investment in a wide range of sectors can also provide S and G benefits. There are many social impact themes linked to the UN Sustainable Development Goals.’
He notes, therefore, that the correct approach is for ‘strategies that already take governance factors into account and also have a strong social focus – in order to offer investors long-term, sustainable benefits and attractive risk-adjusted returns across a wider range of sectors.’
New report sets out ways to improve disclosure on climate-related issues
Companies need to step up their reporting on climate-related issues, according to a new report from the UK’s Financial Reporting Council (FRC).
The 86-page document, released this week, sets out investor expectations for disclosures about climate change and suggests a range of questions companies can ask themselves to improve their reporting.
The report recommends that companies make use of the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) when making disclosures. This framework, created in 2017, bases disclosure around four areas: governance, strategy, risk management and metrics & targets.
‘Investors are rightly demanding more information and greater transparency from companies on the challenges posed by climate change,’ says Sir Jon Thompson, CEO of the FRC, in a statement.
‘As societal and investor expectations evolve alongside the regulatory environment, it is clear companies need to rapidly increase their transparency and improve their reporting to meet this demand.’
The report suggests a list of questions companies can pose as they implement the TCFD framework. For example, on the topic of metrics & targets, it asks: ‘What information is most relevant to monitoring and managing the impacts of climate-related issues? How were these identified and how do they link to the strategy and business model?’
As companies try to understand the long-term impact climate change may have on their business, investor relations will need to work with other departments on scenario planning, notes the report.
‘This involves a fulsome assessment of the future and the company’s key drivers in different contexts, including different climate scenarios,’ write the authors. ‘Such an analysis requires a great deal of co-ordination across many areas, including strategy, finance, risk, reporting, company secretarial, sustainability and investor relations, plus the management and board.’
In the report, there are various examples of how companies are starting to report on climate-related topics. For example, it details how DS Smith, the FTSE 100-listed packaging business, is setting out a roadmap for its climate reporting. The company, through its annual report and sustainability report, explains how many of the TCFD recommendations it is meeting and how it expects its climate reporting to develop over the following year.
The report comes amid renewed pressure on ExxonMobil, one of the world’s biggest oil and gas companies, over its reporting on climate change. The state of New York is taking the company to court over its disclosures about the potential cost of climate change to its business.
Prosecutors claim the company kept two separate accounts covering the potential impact of climate regulation and disclosed only the more favorable figures to investors. ExxonMobil has denied it misled investors, arguing it provided sufficient information, and says the claims are politically motivated.
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