The world continues to face the ever-changing realities of an ongoing pandemic, and last year’s Glasgow Climate Change Conference (COP 26) has given investors much to consider. The momentum around responsible investing is palpable as consumer and regulator expectations evolve, causing many companies to re-evaluate their policies and behaviour. When it comes to Environmental and Social issues, shareholders are demanding action and no longer accepting greenwashing—and entire industries are now paying attention.
This momentum presents both challenges and opportunities for investors. As our clients and the industry at large focus on proactively mitigating risk and capitalizing on this evolving landscape, stewardship will be a key lever for savvy investors—particularly those facing external pressure to divest. Here are the ESG themes we see influencing stewardship priorities this year:
Evolving regulatory requirements are driving the need for engagement.
For a time, it seemed only regulators in certain geographic pockets were focused on enforcing environmental, social and governance requirements. That is no longer the case. ESG regulations and soft laws are emerging around the world—according to the Principles for Responsible Investing, globally there are 750 policy tools and guidance, including 159 new or revised policy instruments in the first eight months of 2021. Increasingly, these policies and instruments include a stewardship component and are focused on outcomes. Investors must increase their due diligence and take specific action to comply with these new policies.
This echoes a broader shift in customer behavior. Consumers are increasingly focused on the environmental and social footprint of the companies they support. Organizations need to identify and understand their ESG exposure to proactively address the specific risks that could impact their investors, customers, and overall brand reputation.
Increasing action around climate change, biodiversity and the ‘S’ in ESG.
The events of the past few years have solidified for many that these three seemingly unrelated topics are actually deeply interconnected. A global pandemic, a worldwide social justice movement, and increasing devastation resulting from natural disasters have shone a light on this interrelatedness.
The risks associated with climate, biodiversity, and the failure to make social change are material and systemic. They are also on track to extend far into the future. With continued biodiversity loss, the risk for future pandemics increases, and our societal inequities highlighted by the pandemic cannot be eliminated or reduced without considerable intervention. One of the ways to get this process started is by engaging with companies and voting.
Stewardship dialogues and proxy voting are becoming increasingly linked.
Voting is an important tool for investors engaging on ESG challenges. When the shareholders of a company act, it is a particularly effective lever for change. Alignment of engagement—what investors are saying, voting, and doing—is critical to turning dialogue into tangible action towards investing in sustainability.
A new year is a great time to consider the global impacts of our decisions. Large, medium, and small investors alike have a unique opportunity to make ESG-centred choices that have a profound positive impact on the companies they invest in and the communities in which they operate.
How can investors get ahead of the ESG curve when faced with multiple competing priorities?
The goal of ESG stewardship is to effect lasting and meaningful change in the organizations with whom we engage. In a world focused on instant gratification and quick wins, generating long-lasting change through engagement is a differentiator for investors ready to realize the benefits of leading the charge towards a just and sustainable future.
Stewardship vehicles can enhance insights and influence when resources are stretched. If you’re an investor without an ESG stewardship strategy, now is an excellent time to consider one. Sustainalytics is an industry-leading ESG service provider, supporting investors throughout the investment life cycle with ESG insights and resources, including a suite of stewardship services. Investors have the opportunity to collaborate with our highly experienced team of engagement managers with diverse experience across a variety of ESG topics. For more information, please download our Stewardship Services Guide, or contact our Stewardship Services team.
Physical Climate Risks: 6 Things Portfolio Managers Need to Know
The negative physical impacts of climate change are being felt by communities and corporations globally and are likely to get worse in the coming years. The knock-on costs of more frequent “once-in-a-century” climate events on economies are likely to rise. To prepare for this looming threat, investors must forecast the asset-level effects of climate change on companies in a granular and sophisticated way. Here are six things portfolio managers should know to manage and mitigate the physical risks of climate change to their portfolios and meet growing list of climate-focused reporting requirements.
Applying Business and Human Rights International Standards to Investor Due Diligence
Socially conscious ESG investors are interested in how to implement international business and human rights norms in their portfolios and understand the potential impacts of applying additional screening criteria within their strategy.
Telecom Network Outages, the ESG Risks of a Connected World
The telecom industry is exposed to several Material ESG Issues, including Data Privacy and Security, Business Ethics, Human Capital and Product Governance. Product Governance issues in the telecom industry include service quality, maintaining reliable, high-speed networks, and responding to customer billing concerns.
ESG Risks Affecting Data Centers: Why Water Resource Use Matters to Investors
Data centers play a critical role for many technology and telecom companies and for their supporting servers, digital storage equipment and network infrastructure for data processing and storage. Data centers require high volumes of water directly for cooling purposes and indirectly, through electricity generation. Morningstar Sustainalytics’ recent activation of the Resource Use Material ESG Issue (MEI) within its ESG Risk Ratings recognizes water risks of data centers.