Who should determine whether ESG factors are integrated into corporate decision-making? Should it solely be a company’s choice, or are the views of fund managers paramount?
- Should companies solely determine whether and how they integrate ESG concerns into their business decisions? And what role do fund managers play in such decisions?
- An Edelman survey revealed that 90 percent of respondents wanted brands to protect employees and suppliers even if it comes at a financial cost. The survey also found that around six in ten respondents believe that U.S. brands need to get their house in order with regard to racial injustice.
- Findings from Refinitiv’s Sustainable Finance Review showed that the COVID-19 pandemic has amplified consumers’ desire for sustainable companies.
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In a piece entitled “Better to leave the free market alone” Robert Shillman, chairman of the NASDAQ listed Cognex Corporation, bemoaned a “trend of bashing both our free enterprise system and our businesses which have thrived under that system for the past 200 years.”
In particular, he took aim at fund managers, whom he accused of pressurizing companies “to include ESG factors when making business decisions”, questioning whether fund beneficiaries would approve of such an approach.
Shillman posed the question: Do [fund investors] want the board of directors and the managers of your companies to spend time and energy on environmental, social and governance issues or do [they] want them to spend all of their time and energy on increasing the value of [their] shares?”
He responded: “I’m rather sure that an overwhelming number of them would choose the latter.” Many would argue the data shows unless you do a good amount of the former, you can’t deliver on the latter.
How should ESG factors be integrated?
That said, it would be wrong to describe Shillman as an ESG sceptic. It is rather more complex than that.
Shillman believes the integration of ESG factors in corporate decision-making is important and he takes pride in Cognex’s impressive track record in this regard. But he believes it should be left to companies to determine whether and how they integrate ESG concerns, not institutional investors.
Shillman wrote the above in his company’s 2018 Annual Report. There has obviously been a lot of water under the bridge since then.
A new consensus has emerged that the ultimate beneficiaries of funds — citizens — expect large, institutional fund managers to do precisely what Shillman argued against, when it comes to investing their life savings, looking after their pension pots, and so on.
The aftermath of COVID-19, and the reaction to the tragic murder of George Floyd in the U.S. have turbo-charged the focus around ESG, and lifted the prominence of the “S” and the “G” in ESG. There is no doubt the #MeToo campaign and backlash against fiscal austerity before 2020 had an impact before this too.
The public’s view of ESG
Over the summer, Edelman carried out a survey of over 22,000 respondents in 11 markets as part of their ongoing Trust Barometer. This underlined the importance attached by the public to the ESG profile of businesses today.
The survey revealed that in the face of the COVID-19 pandemic, 90 percent of respondents want brands to protect the well-being and safety of their employees and suppliers, even if it means suffering big financial losses until the pandemic ends.
After the death of George Floyd shone a light on racial injustice and precipitated statements of solidarity with the black community from business leaders, respondents said brands in the U.S. must first get their own house in order by setting an example within their organization (64 percent), by reflecting the full diversity of the country in their communications (63 percent), and by making products accessible and suitable to all communities (61 percent).
The consequences of businesses not meeting expectations now are stark. For example, 60 percent of all respondents said they will buy or boycott a brand based on its stand on racial injustice.
The investors’ view
Furthermore, investors increasingly do not see ESG integration and financial returns as an either/or choice, but two sides of the same coin.
In Edelman’s latest Investor Trust survey of 607 institutional investors, representing investment firms that collectively manage over $9 trillion in assets, 54 percent of respondents stated that ESG initiatives led to a favourable impact on growth and 47 percent said it boosts the return on investment.
A good example where a poor ESG profile damages the financial standing of a business is the UK fast fashion chain Boohoo. It lost one-third of its market value in July after controversies relating to its supply chain were exposed.
This is all corroborated by data on ESG funds flows this year.
Refinitiv’s Sustainable Finance Review shows that in the first half of 2020 nearly $200bn in sustainable bonds was issued globally — an increase of almost half, year-on-year, and double the amount raised in H1 2018.
Remarkably much of this growth took place in Q2, when the pandemic was at its worst. During that period, $130bn was raised, the highest quarterly amount ever. Likewise, social bond issuance has rocketed with already more than double the total amount raised in 2020 than for the whole of 2019, driven by capital raising for COVID-19-related recovery efforts.
Millennials driving demand for ESG products
This trend is only likely to continue. Millennials — those born between 1981 and 1996 — were significant drivers of the growth in demand for ESG products, long before the COVID-19 era started, and their influence is set to escalate.
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According to a 2018 U.S. Trust Insights on Wealth and Worth® survey, 87 percent of millennial high net investors say a company’s ESG record is an important consideration in their decision about whether to invest or not. And there is a huge, inter-generational transfer of wealth currently ongoing, with around US$24 trillion expected to come under the control of millennials from this year.
So the truth is that in this post-pandemic world, it is actually the free market that is demanding ESG factors are integrated into corporate business decisions — fund managers are simply following the orders of investors.