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Shareholders Keep Up ESG Pressure Despite Performance Setbacks
The EQ Shareholder Voice data shows overall interest in responsible investing has continued to increase rapidly in the last 12 months, despite a backlash against it in some quarters.
In 2021, 13% of retail investors in the US and UK said “desire to influence a company’s behaviour” was a top three factor in picking a share. In 2022, this rose to 19%. In addition, more investors said they were likely to vote at AGMs on environmental, social and governance (ESG) related issues than they would on those affecting financial performance.
34%
describe themselves as “fully confident and informed”
This year, the cohort of retail shareholders who want to influence companies has gained support among older (57+) investors – up from 4% of investors last year to 15% in 2022. They remain confident investors – more so than the average – and are in it for the long term. 34% describe themselves as “fully confident and informed” versus 28% of the whole sample. They are also more likely to be employees (25%) versus non-employees (14%).
The sector has not been immune from stock-market gyrations, and the performance of many ESG stocks has suffered in the last 12 months. Of those keen to influence companies, 47% have replaced some stocks with shares that they believe offer a better return. But they could just be tweaking portfolios to align with the economic cycle. Looking at the data as a whole, it looks like a temporary setback for the ESG movement, at worst.
ESG continues apace
Overall, the survey suggests companies must maintain a strong focus on keeping ESG-led investors onside and ensuring they have the information they need. Zally Ahmadi, senior vice president, corporate governance, ESG and executive compensation at EQ & D.F. King, says most research shows ESG investments correlate well with long-term returns.
“So, most investors who want to integrate ESG are in it for long-term returns,” she says. “Short-term shakeups probably won’t affect their strategy much. There is still increasing pressure on companies around ESG, including from larger investors. Plus, there is lots more disclosure from companies, which is driving greater interest among all investors.”
Richard Davies, managing director, investor relations services at EQ, says most investors realise ESG is a work in progress. For example, the war in Ukraine highlighted complications involved in ESG ratings of Russian and Chinese companies. Meanwhile, there has been a backlash against ESG investing from some US Republican politicians. High-ranking representatives and general attorneys of several US states have issued statements questioning the wisdom of allocating public pension funds to ESG investments when oil stocks are rallying.
“But overall, the ESG movement continues apace, and we’ve done research showing that nearly all public companies take it very seriously, with dedicated subcommittees and CEOs taking full responsibility for the ESG process,” says Davies. “They know major issues such as climate change could affect profitability in the coming years, and they understand the potential benefits, such as helping to raise capital.
“There is also still a strong commitment to ESG among asset managers. Their understanding of the risk management issues is improving, and there is less greenwashing.”
Of those who hoped to influence companies
More Shareholders are looking to influence company behaviour
Shareholders who ranked ‘influencing company behaviour’ as a top three reason for owning shares
Source: Shareholder Voice 2022
Focus on what matters to you
Ahmadi says many companies she works with have great ESG-related initiatives – they are already doing good work in this area. But their investor communications on the subject are inadequate, so they need to bridge that gap.
“One problem is it’s easy to get lost when trying to figure out what ESG factors to communicate,” she says. “Many companies think they need to disclose everything about subjects from climate change to diversity and cybersecurity. They do not know how to start. “My advice is focus on messaging about what ESG factors matter to your company. What ESG factors impact your employees, stakeholders, and your bottom line? Start by communicating about them.”
Stay on the front foot
Anne-Marie Clarke, head of corporate governance, EQ Advisory, says another factor prompting companies to engage with investors on ESG issues is when regulation doesn’t drive change quickly enough to address public interest in an issue – such as diversity or the living wage.
“When there is such a delay, campaign groups like ShareAction can look to retail investors to act on it and create a shareholder resolution to vote on,” she says. “That’s where the retail voice can count as it can bring companies’ attention to the issue much more quickly and easily.” Clarke says companies should be on the front foot with these important issues as they arise and use different channels beyond the annual report to engage with retail investors on them.
“We’ve worked on a few campaigns with forward thinking companies that use social media and digital channels to reach retail shareholders,” she says. “The aim was to bring them on a journey about what they are doing, rather than just communicating once a year. They found it to be effective. Companies increasingly need to reach out to retail investors and many could do much more on this.” If the issue is important enough, they could even create a full digital and social media strategy around it, she adds.