Big investors want more detail on ESG, executive pay

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Institutional investors are demanding more corporate disclosure on sustainability, remuneration and business strategy to guide proxy-voting decisions, a new global survey has found.

In a release, Kiran Vasantham, Morrow Sodali director of investor engagement, said: “This survey provides issuers with valuable insights on investor expectations and voting policies.”

Morrow Sodali is an international corporate governance advisory firm. Its latest survey found institutional investors were looking for deeper and more nuanced information from boards rather than “box-ticking” compliance statements.

“Investors want more substantive information about board composition and business strategy. They want clearer explanations of the business rationale for governance and executive pay decisions,” the Morrow Sodali study says. “They want an integrated narrative that explains environmental, social and governance [ESG] practices in terms of business risk and sustainable financial performance.”

In its fourth annual poll of 46 global institutional investors, representing over US$33 trillion, Morrow Sodali found respondents were also more willing to band together on key issues such as executive pay.

Previously, institutions tended to engage as stand-alone entities with their portfolio companies on executive remuneration concerns, the report says.

“Increasingly however, as some of the pay debate shifts to quantum and reputation (at least in some markets, notably the UK but also other European markets), investors find themselves able to work together to put forward certain points,” the survey says.

Almost 90 per cent of respondents also said including ESG metrics in executive pay incentives was ‘important’ or ‘very important’.

“Sustainability concerns are now firmly part of executive pay evaluations, although these types of metrics do not supersede traditional measures,” the report says.

Climate change ranked as the single-most important ESG issue for companies to address, Morrow Sodali says, although some definitions were up for debate.

“The challenge for both companies and institutional investors is to better understand and agree upon which [climate change]metrics are relevant to a company’s long-term performance and agree on standards that permit comparability with its peers and within a specific industry,” the report says.

Investors were also becoming more open in co-operating with ‘activist’ shareholders, particularly where the issue centres on “a credible story focused on long-term strategy”.

“Strategic shareholder activism is now defined as an asset class. Activism is here to stay,” the study says. “The debate over whether activism creates or destroys value is now mainly a topic of interest to academics and regulators, while companies must adapt to the realities of a marketplace that encourages activism.”

Overall, the survey found institutional asset owners wanted underlying managers to “integrate ESG considerations into the investment decision making process”.

“The change of pace around ESG integration, the continued rise of activism and recent corporate scandals all combine to create an ever-growing necessity for issuers and their officers to keep abreast of the agenda and intentions of their Institutional Investors,” the report says.

Morrow Sodali, with headquarters in New York and London, boasts more than 700 corporate clients spanning 40 countries, including the Australian banks, Commonwealth, ANZ and Macquarie.

– David Chaplin, Investment News NZ

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