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Long-term investors now hold sway over ESG

One-day issues have suddenly become the subject of short-term focus.
Whether the engagement process is fast enough remains to be seen. Image: Bartek Sadowski, Bloomberg

Long-term investors – those who have perpetually flagged the kind of systemic and workforce issues that now face companies everywhere – are having an outsized influence during this global crisis.

Part of that is [seen in] the surge in interest in environmental, social and governance (ESG) investing. UBS this week said it saw flows to ESG funds and pandemic bonds of more than $71 billion in the second quarter, bringing industry ESG assets under management to $1 trillion for the first time.

Citing Morningstar data, the firm found that 56% of sustainable funds outperformed their peers in the second quarter. Sustainable investors will likely keep the wind at their backs as governments push green stimulus, the Swiss bank’s analysts said.

Historically, long-term investors haven’t been the loudest voices at companies, but there are signs short-term shareholder activists at big companies are starting to get crowded out in such a volatile market. Shareholder activist campaigns at companies valued at more than $1 billion fell 25% in the first half of the year, according to Bloomberg Intelligence.

Speaking up

Long-term investors hold the most sway in annual meeting season, which is just wrapping up for the year. Even though much of the shareholder proposal process was set in motion before coronavirus lockdowns, the first ever virtual-only corporate annual meeting season showed long-term investors more willing than ever to speak up on ESG issues.

Investors had more success on climate change and increasingly pushed companies on human rights, diversity and pay equity. They more frequently opposed individual board member elections, were slightly more willing to oppose executive pay packages, and less tolerant of dual class shares.

In a review of the 2020 proxy season this week, Morgan Stanley analysts found environmental proposals have declined 64% since 2016, as companies have been more inclined to preemptively address shareholder environmental requests rather than risk a proposal. Social proposals, however, have increased steadily over the past four years. Both kinds of proposals saw increasing support, with the average up to 26% in 2020, compared with 19% in 2017, the firm said.

Proposal ‘pass rates’

While few shareholder proposals ever garner majority support, even that was more common this year, Morgan Stanley found.

The pass rate for environmental proposals rose to 18% in 2020, while no environmental proposals had passed in 2019. And the broader focus on social and inequality issues in the Covid-19 era also translated into higher votes on social proposals. Their pass rate rose to 9% this year, compared with 2% in 2017, and for diversity proposals in particular the pass rate was 20% compared with zero in 2018. In a US presidential election year, lobbying and political transparency proposals also won increasing support, seeing 36% support on average in 2020, compared with 25% in 2017.

“Corporate proxy voting records are a useful indicator of the direction of travel for ESG issues, as they highlight how investors are thinking about ESG risk and value, and indicate where corporate focus might be likely to turn in the near term,” Morgan Stanley strategists led by Allison Binns, Mark Savino and Jessica Alsford wrote in the research note.

If anything has become more obvious in the past few months, it’s that long-term issues are suddenly a matter of short-term focus, but that raises the question of whether the process for long-term ESG shareholders to engage with companies is fast enough.

Emily Chasan writes the Good Business newsletter about climate-conscious investors and the frontiers of sustainability.

© 2020 Bloomberg

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