Edelman Trust Barometer Special Report: Institutional Investors – Is ESG An Expensive Luxury In The Middle Of A Pandemic?

Article by Iain Dey, Edelman

Over the next six months, Britain’s boards should expect to be held to task over their company’s track record on climate change. And it is non-executive directors who will be expected to press the leadership class for answers.

This is one of the findings from the Edelman Trust Barometer Special Report on Institutional Investors, which was launched this week. Now in its fourth year, the report is based on a survey of 600 fund managers in 6 different geographies.

Some 83% of the UK investors polled said that they would be engaging with boards imminently to ask for more details on the impact of climate change on the economy. Of those investors polled, 80% said they would be asking questions about resource scarcity. And 82% said they would be cross-examining NEDs on the eco-efficiency of a company’s operations.

Climate change is going to be near the top of the political agenda in 2021, as Boris Johnson has flagged with his attention-grabbing announcement to ban the sale of new petrol and diesel cars from 2030. It’s not just that Britain is playing host to the COP-26 United Nations climate summit in Glasgow next year. More broadly, the chance to “build back better” in the recovery is being seen as a chance to claw back lost ground on the environmental agenda.

From investors’ perspectives, the focus on climate is about something else entirely: a quest for better, more sustainable returns.

The ESG movement has gone mainstream. In part that’s due to a generational shift among the people controlling money, with millennials now rising to positions of power and demanding fresh perspectives on business. More tellingly, there is an increasing body of evidence to suggest that the businesses who place the most attention on Environmental, Societal and Governance issues just produce better returns.

Our survey finds that 93% of investors internationally believe that the companies run according to a multi-stakeholder model deliver the best financial returns. More specifically, 91% of investors say that companies who score well on ESG are more resilient in a crisis.

As a result, 86% of investors say they are rewarding companies that reduce their near-term return on capital by cutting a dividend or reducing a buyback in order to divert more resources to ESG initiatives.

At the panel debate where we discussed these findings, Jeremy Taylor, the CEO of Lazard Asset Management, saw this correlation between high ESG scores and high returns as a blindingly-obvious connection.

“It’s not about value companies or growth companies,” he said. “It is about quality companies. And quality is all about returns on capital and making good, appropriate financial decisions. If we think about it, we know that companies with good ESG ratings are making good decisions about their employees, about the environment, about society, about their products - they are also probably making good capital allocation decisions. It is about incorporating all these stakeholders together that really leads to better financial productivity, better financial outcomes, and that’s where quality companies over the long-term, have outperformed.”

Stephen Bird, the chief executive of Standard Life Aberdeen, put it more succinctly: “Culture eats strategy for breakfast.” 

A good culture is one of the most important things that investors are trying to find in a business. Increasingly, ESG is the scorecard that they are using to determine whether a business has that secret elixir of a high-functioning, healthy culture. It’s a modern metric for old-fashioned values.

When we asked who in a company is expected to be leading the charge on this topic, it is not the HR department but rather the board of directors – 45% of our investors said it was the non-executives with whom they planned to engage on ESG issues, more than any other category of company representative.

As we look ahead to the judging of this year’s Non-Executive Director Awards, it will be interesting to see how many submissions flag the achievements of those individuals who have pushed the ESG agenda in Britain’s boardrooms. Based on what our investors have told us, those organisations will be the same businesses that see an improvement in financial performance.

Read our full report here

To nominate someone for this year’s Non-Executive Director Awards, follow this link: nedawards.co.uk/nominate

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