The investors' engagement revolution: An ongoing but unfinished transformation
ESG integration and engagement: A real transformation is taking place, with institutional investors and asset managers now required to implement engagement policies and report on them. But spreading ESG culture and values takes time.
Investors' engagement is on the rise
The beginning of this 2019 proxy season has illustrated the increased engagement of shareholders to make companies, executives and boards accountable for their actions. Bayer’s shareholders rebuked management following what appeared to be a negative assessment of the ESG risks associated with the Monsanto merger. The shareholders at UBS and ING followed a similar path by refusing to absolve the board or the management on the basis of a lax approach to tax evasion or money laundering.
This trend is the continuation of other successful engagement campaigns in previous years, like the «Aiming for A» initiative that pushed oil companies on both sides of the Atlantic ocean to disclose how they were planning to take into account climate change and implement a 2 degree scenario, the Climate Action 100+ coalition that obtained strengthened climate commitments from numerous companies or the now recurring “shareholders springs” trying to tame the excesses of executive remunerations.
A change of paradigm in governance between investors and companies
This kind of responsibility for investors is a relatively new trend in ESG. Historically, governance or ESG regulations were mainly centered on creating or reinforcing rules and good practices for companies. But the aftermath of the financial crisis of 2007-2010 has experienced a change in paradigm forcing investors to also face their responsibilities and stop playing «absentee landlords». The UK Stewardship code of 2010, then followed by many others around the world, has launched a new responsibility framework for investors that are, from now on, in charge of contributing to the good governance of investee companies and also, more broadly, to the sustainable functioning of financial markets.
The revised shareholder rights directive of 2017 (SRD2), by requiring institutional investors and asset managers to implement engagement polices and report on them in order to «improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors», is potentially a real game-changer.
The risks of Greenwashing, free-riding and boilerplate reporting
ESG investing is blooming, as illustrated by the latest report by the Global Sustainable Investment Alliance that announces sustainable investing assets of $30.7 trillion at the start of 2018, a 34% increase in two years. But such success also raises concerns about the true ESG substance of those assets. Some investments of those funds in companies or sectors that do not look very sustainable have resulted in public criticism and accusations of greenwashing. In some cases, the situation could be explained by a false understanding of ESG investing and its various approaches (integration, exclusion, best in class, engagement …), but other cases were just showing a very light understanding and/or implementation of sustainability. To avoid such greenwashing, the European Commission, as part of its Action Plan on Financing Sustainable Growth, is proposing a taxonomy of activities that can be considered as sustainable. Some investors have also been accused of not «walking the talk» when their proxy-voting record was showing limited support for ESG shareholders resolutions despite public support for those issues.
But, unfortunately, a substantial part of the investor community cannot even be accused of greenwashing, either because they do no report anything slightly relevant in the ESG area beyond platitudes, or simply because they let the other investors do the work as they know they will also benefit from the improvements in investee companies and a better functioning of the markets at large.
Changing the investment and coporate cultures takes time
But those risks do not justify dismissing the transformation that is happening. A common criticism of ESG integration and engagement was that those activities were operated outside of the investment core businesses without a global and consistent approach. But it was probably a necessary step, similar to what companies experienced when CSR departments were part of communication departments and not integrated into the real business and strategy. A strong tone at the top is needed to spread ESG culture and values to institutional investors and asset managers. Larry Fink at Blackrock, Hiro Mizuno at GPIF and Yves Perrier at Amundi are some of the leading voices that enable that transformation within large organisations. Just as integrated reporting has been necessary for companies in order to holistically present their financial and extra-financial performances, investors also have to show how their investments can accommodate financial returns with ESG impacts. Article 173 of the French Energy Transition law, and its likely transposition at the European level, combined with the reporting requirements on the engagement of SRD2, are creating a framework from which the effectiveness of ESG commitments and investors' actions will become assessable for their clients and for the public.
We are experiencing a deep transformation on how investors, companies, financial markets and society at large are interacting. For the most optimistic of us, we are maybe seeing the foundations of responsible and sustainable capitalism. Even if the process is slow, bumpy and very often frustrating for those who examine or contribute to it, we cannot become discouraged as, if that revolution fails, another one, more violent, could replace it.
Cédric manages a team producing research and voting recommendations on French companies for clients globally, engaging with management and directors and monitoring corporate governance developments. Prior to this role, he was Head of Corporate Governance at Amundi and worked as a governance analyst at CAAM and Axa IM. He graduated from Paris II University, International Economic Law from Paris X University and Politics from New York University.