- Increasing Shareholder Accountability Precipitates Increasing Board Accountability
Increasing engagement with non-executive board members, increasing “active” style voting, increasing integration of ESG factors into the investment process, wider issues on the ESG Agenda including Human Capital and Corporate Culture are key themes in the CMi2i 2018 Annual Investor Corporate Governance Report.
- ESG Is an Integral Part of the Investment Process
With 71% of respondents increasing their stewardship teams over the last five years, ESG is increasingly considered to be a fiduciary duty of investors.The research shows that asset managers are facing increasing pressure from their clients to demonstrate that they have assessed fundamental ESG risk and opportunity within their investment strategies, as well as how their portfolio companies make positive contributions to sustainable development.
- Greater Non-Executive Board Accountability and Engagement
With the growth of shareholder accountability and the role of ESG in investment decisions, the research shows that there is strong interest from respondents to hold dialogue with their portfolio companies on a range of ESG areas, but that issuers are not fielding the relevant representatives during these meetings.The research clearly shows that there is strong shareholder demand to meet with the non-executive Board members, including the Chairperson (94%), Senior Independent Director (76%) and Committee Chairs (71%).In addition, a common theme throughout the Report is that institutions will look to hold Board directors accountable through expressing their concerns by voting against their re-election at AGMs if they do not feel issuers are responding adequately to dialogue.
- Increasing Investor Collaboration and Escalation in Forcing Change
To form a consensus of opinion as to what constitutes best practice, investors will pool their resources and share ideas. Their collective objective is to explore how they can positively influence company corporate governance standards.It is also worth noting that in the case of passive investors, for example those managing Index Funds, the only way to minimise investment risk or unlock value is by using their voice and their vote. Escalation policies are therefore of paramount importance to them.
- Human Capital and Corporate Culture Join the Dynamic ESG Agenda
With ESG investing progressing into the mainstream, so has the range of subjects that are coming within its scrutiny. This year, for example, saw Gender Diversity increasing from ninth position in 2017 to second in 2018, with Human Capital and Corporate Culture coming on to the agenda for the first time. The Survey also highlights that companies are still not providing adequate disclosure on environmental and social impact. With the ESG agenda in such a dynamic state, the need and desire for investor engagement with the Board is only likely to become stronger.
The evolution of ESG issues in the investment process is proving to be both fast and dynamic. In the first instance it is manifesting itself in a desire for increased transparency and engagement across a dynamic range of subjects. If these demands are not met, then direct, potentially collaborative, action through divestment and/or escalation is highly likely. Already in 2018, two of the world’s largest passive investors, Blackrock and Vanguard, publicly stated their commitment to increasing their ESG teams, and committing to hold companies to account on ESG issues. Similarly, the recent events surrounding Carillion in the UK have seen both shareholders and Board members brought before a Parliamentary Select committee and accused of being ‘asleep on the job.’Non-executive Board members therefore need to keep themselves more informed than ever and be prepared to ensure that they inform their shareholders and other stakeholders on how they are approaching, assessing and managing their ESG risk and opportunities.