COVID-19’s impact on the business world is dramatic, but one part where it might actually cause more activity is in environmental, social and governance investments, according to a new study by Nuveen.
“I’m asked if companies and investors are going to be pulling back from ESG,” said Peter Reali, head of engagement for Nuveen. “Absolutely not. If anything … it’s going to become more relevant.”
Indeed, Morningstar’s Jon Hale, head of sustainability research, pointed out in a recent blog post that ESG funds were performing well in the current bear market, writing, “Broadening the perspective to this year through March 19, the relative outperformance of sustainable equity funds is even better. The returns of 7 of 10 sustainable equity funds ranked in top halves of their respective categories. The returns of 40% ranked in their category’s top quartile while only 8% landed in their category’s worst quartile. In other words, five times as many sustainable funds ranked in their category’s top quartile than in the bottom quartile.”
However, a recent rule change proposed by the Securities and Exchange Commission limiting proxy submissions could be a problem for ESG-related proposals going forward. Depending on what the agency decides after sorting through industry comments, many ESG requests to company boards may be silenced. In fact, Nuveen found that if the proposed rules were in place going back to 2010, 614 ESG-related proxy proposals wouldn’t have been able to be submitted.
With that in mind, Nuveen’s recent study provided some key trends to watch in 2020:
- Environmental and social topics are investor hot buttons: Despite the SEC’s desire to tap down on proxy submissions, Nuveen noted 2020 would most likely see the fourth all-time high in these submissions. “Already these proposals account for 66% of all submitted proposals in 2020.” Most of these will be focused on climate change, notes Nuveen.
- Shareholders will expect action on climate change: “Although not all companies are necessarily contributing immensely to actual carbon getting released in the air, their businesses will be impacted by climate change,” Reali said. “Real estate, insurance, autos, the list goes on for all the reasons why you’re seeing more proposals [related to it]. This is a relevant topic for a much wider set of companies than, perhaps, opioids.”
He adds that the coronavirus also will affect these proposals. “How companies deal with COVID-19 … perhaps is indicative of the way boards and management will respond to future global crisis, and many people would put global warming in that category,” he said.
- Stakeholders will seek transparency on gender parity and workplace diversity: Despite the move to add women to boards, the question becomes “what is the role of diversity in the boardroom?” Reali says. “Although every S&P 500 company has at least one woman on the board, not a lot of them have been put in a position in which they can really influence actions of the board [like chairman or chairman of a committee]. That’s going to be a very important factor that we scrutinize.”
In fact, Nuveen found that that 29% of S&P 500 companies have no women on their boards in positions of influence, while for the Russell 3000, it’s 49%. Financial services fares better, with only 18% of its companies in the S&P 500 having no women in a board power position, while the Russell 3000 is 47%.
- Executives should expect the integration of environmental and social metrics into compensation: Previously, many companies have been pushed by stakeholders on disclosure regarding their ESG practices, but now stakeholders will want to see tangible actions. Reali also says executives will find compensation increasingly tied to achieving these goals.
- Regulatory changes will create hurdles making the future of environmental and social proposals uncertain: Although the timing is in question, Nuveen states the SEC’s proposed rules won’t go into effect in the 2020 proxy season. But going forward, they “create an environment of uncertainty around important shareholder rights that will restrict shareholders’ ability to meaningfully engage with company management.”
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