ESG investing: Shareholders are demanding a new social contract

By: Martin Grosskopf • May 17, 2019

It’s that time of year again, when shareholders get ready to rumble.

In other words, it’s proxy season, the cycle of annual corporate meetings when shareholders vote, either in person or by proxy, on the investment issues they deem most important. And there’s little question this yearly spectacle, which was once a relatively staid and mild-manner affair, has evolved into what some might consider a hotbed of activism.

In 2018, for example, investors smashed the record for the number of campaigns launched against companies of every stripe–from small-caps to corporate goliaths, including eBay, Campbell Soup and Manulife Financial. All told, funds launched 922 global campaigns against public companies, including 75 in Canada, compared to just a handful in 2003, according Activist Insight, which monitors activist investing worldwide. While the majority of those challenges were tied to governance, a growing number also concerned combating climate change, human rights and food safety.

Likewise, AGF Investments Inc. supported 366 shareholder proposals on environmental, social and governance issues (ESG) in 2018, including 303 on governance issues, 29 on social issues, and 28 on environmental issues; another six were related to ESG disclosure, according to AGF’s own data.

Clearly, a monumental shift is underway—backstopped by the Principles for Responsible Investing (PRI), an international network of investors supporting ESG principles and now representing over US$80 trillion in assets, including the world’s largest pension funds and asset managers, according to PRI statistics.

What these figures clearly show is that the world is now pushing social issues onto the market and there’s no going back.

It’s little wonder. We’re facing some pretty big challenges.

Consider that for much of the last 50 years, economic policy has been directed at improving Gross Domestic Product (GDP) as a narrow measure of success, despite mounting evidence that wealth in society is becoming more and more concentrated. Whereas the poor and middle class used to garner the largest income growth, now it’s only the very affluent that are seeing significant income growth.

ESG-chart-income-growth-e-01
Note: Inflation-adjusted annual average growth using income after taxes, transfers and non cash benefits. Source New York Times, August, 2017.
Meanwhile, most economists and policymakers have come to accept the idea that growth can be ‘’decoupled” from environmental impacts—that an economy can grow without using more resources and worsening environmental issues. And while it is true that there’s evidence supporting this idea, much of this has been achieved by offshoring the most intensive manufacturing processes to emerging economies. However, that appears to be changing. China’s refusal to accept plastic waste streams from around the world, for example, is but one example illustrating that this conduit is now closing.

Shifting investor attitudes

Certainly, the sheer volume of cash being funneled into ESG investing suggests people care more about these issues than ever before. A couple of Edelman surveys from last year illuminated some of the investor mindset. For example, according to the company’s Trust Barometer survey, survey participants said 65% of CEOs should take the lead on change rather than wait for government to impose it. Meanwhile, Edelman’s Institutional Investor Trust Report revealed that 98% of global investors think public companies are urgently obligated to address one or more societal issues to ensure the global business environment remains healthy and robust.

With a lack of consensus at the political level on so many issues—most notably climate change—investors are increasingly filling the gap, stepping in where nations once saw it in their best interest to act.

Value and values begin to overlap

How did we get here? The foundation was laid in 2003, when the United Nations convened a number of forums in which participants outlined the materiality of environmental, social and governance issues in terms of both financial returns and the well-being of the world’s citizens. Participants in these early initiatives, including AGF, foresaw a broadening role for the financial community—demonstrating the overlap of value and values in a series of documents. The market has come to accept this vision, identifying a wider range of issues as material to long-term investment strategies. In other words, returns-driven investors are increasingly sharing the stage with those motivated by “values” alone.

And while acceptance of ESG is at an all-time high, there’s increasing confusion over a number of issues.

Let me explain.

For one thing, there’s growing concern about the lack of standardization of ESG data, with critics lamenting that much of the data is currently unworkable. Yet, the expectation that there will ever be a consensus view of ESG data is misguided—in much the same way that financial metrics are interpreted a myriad of ways depending on the investment approach. Standardization is a work in progress, and as measurement and disclosure improve, the investment community will undoubtedly hire more talent to interpret this data, improving our understanding of both environmental data and social supply chain issues.

Demonstrating impact and the role of the corporation

Secondly, we need to think more clearly about how the financial industry can demonstrate impact on the big issues. Investing in companies that are reducing their environmental footprint may move us in the right direction. But if global emissions continue to rise, is it enough?

Speeding capital to companies that can effect positive environmental and social outcomes will be critical in the next few years. Canadian resource companies, in particular, need a renewed narrative in order to attract global capital. Fortunately, the Federal Expert Panel on Sustainable Finance is now grappling with these very issues and will report on their findings in the coming months. Stay tuned.

Lastly, we can’t forget the role of the corporation in all of this. For years, forward-looking companies complained of a lack of interest in their corporate social responsibility (CSR) initiatives. Today, many wish they could turn back the clock. In fact, many view themselves as under siege and going public is increasingly the last choice for entrepreneurs—especially if they are able to attract sufficient capital in the private markets. This trend has a profoundly negative impact on the health of capital markets as the number of publically-traded stocks decline, and the number of indexes increase. That ratio now stands at 70:1.

This is especially worrying. As the most accessible slice of the markets decline, the risk of market concentration rises while the best returns accrue to those few with access to the private financings. Democratic markets are essential for involving investors in wealth creation and increasingly for making progress on key social and environmental issues.

My hope is that engagement, and proxy voting as its most visible component, works  in support of active investment decisions—in others words providing capital to the most well-positioned companies over the long-term—and not merely as a competition to show the most activity. Finding a common ground between investors and public companies has never been more important. 

Martin Grosskopf is a Vice-President and Portfolio Manager at AGF Investments Inc.

The commentaries contained herein are provided as a general source of information based on information available as of May 9, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments LLC (formerly FFCM, LLC), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
™The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.
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