Environmental factors top list of investor priorities

Environmental and corporate governance issues topped the list of biggest priorities for the UK’s largest investors – but stewardship engagement remains an area of concern, a report reveals.

EY’s inaugural report into investor stewardship and engagement found that while investors and asset managers were most focused on environment and governance matters, they were less engaged on important areas such as audit, corporate reporting, trust and reputation.

As a result, EY warned asset managers and investors to ‘step up’ their level of interaction and stewardship with the companies in which they invest.

EY’s report analysed how the UK’s top 30 asset managers and investors reported on and engaged with their investee companies, looking at 25 priority areas of stewardship including succession planning, culture and values, competition and climate change.

Climate change and sustainability emerged as the highest areas of priority for investors and asset managers.

Engagement with boards and senior management included addressing companies’ carbon emissions, adapting to climate change and resource scarcity; and preparing for physical climate risks.

The research showed that multiple investors are applying ESG assessments to help take environmental considerations into account when making investment decisions.

Some pension funds are also actively engaging on climate risks, with at least one linking the real value of its members’ retirement income to the state of the environment in which they will be retiring, according to the report.

Corporate governance ranked as the second-highest area of stewardship engagement, with topics including executive remuneration, director independence, leadership composition, risk oversight and succession planning.

EY classified corporate governance as a ‘developing’ area of focus.

On EY’s scale, one is classed as ‘emergent’ activity with limited investor focus, and five is classed as ‘leading’ where investor policy is clearly communicated and supported by strong evidence of engagement. Corporate governance received an aggregated average rating of 2.07.

The research found significant disparities in the level of engagement between asset owners (score of 1.10) and asset managers (2.56), concerning corporate governance, indicating an opportunity for asset owners to increase their level of interaction and better signal their expectations to investee companies.

For example, while numerous investors evidenced policies and engagement around gender diversity of boards, few demonstrated engagement around other dimensions of diversity such as ethnicity, skills and tenure.

Audit and assurance received a low stewardship priority score of 1.36, with auditor appointments receiving a score or 1.50 and audit quality scoring 1.53.

However, EY said it expects these scores to increase in the future as recent high profile audit failures in the UK lead to heightened regulatory and government scrutiny.

Trust and reputation (1.08) and corporate reporting (1.43) were ranked amongst the lowest scoring areas of stewardship, with limited evidence of how investors are engaging with businesses on these issues.

“Asset managers and asset owners have a vital role to play in setting the standards expected from the companies they invest in,” Hywel Ball, EY’s UK managing partner of Assurance, said.

“While it’s encouraging to see more engagement on issues such as climate change, the research shows there’s a need for deeper dialogue between business, investors, and society on other important issues such as supply chains, purpose, and trust,” Ball added.

Andy Griffiths, executive director of the Investor Forum, said embedding stewardship in investment processes requires more than effective code and regulation, and needs commitment and innovation by asset owners and asset managers.

“Given the complex investment chain, a principles-led approach, which places the role of culture and governance at its centre, is key to incentivising all parties to do the right thing.

“In our experience, neither investment approach nor style should impede stewardship capability,” Griffiths added.

Last Updated: 22 September 2019
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