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According to Morningstar ESG-focused “sustainable funds" saw net inflows of more than $10 billion in capital during the second quarter of 2020. This brings the year-to-date inflow into ESG investing funds to $20.9 billion. The full-year record in 2019 was $21.4 billion so ESG-focused funds are projected to beat the record by year-end, which shows the future promise of socially conscious investing.
Despite the rise in ESG investing, there is yet to be a standardized set of reporting requirements defined. That not only makes it difficult to hold accountability when it comes to corporate governance, but it also makes ranking difficult to quantify or validate. To date, ESG rubrics have been more qualitative than quantitative, which also means investors cannot improve their investment’s impact without measuring it.
In our latest whitepaper, we offer investors a framework on how to ensure their investment impact is aligned with their intentions. Below is a brief synopsis
First, set goals and priorities. An investor’s priorities and goals should reflect the corporation’s set of values, objectives for shareholder value creation, style of investing, and corporate governance. In this initial stage, investors should focus on their true intentions and motivations. By defining values, an investor can set concrete social and environmental goals and objectives for their investments. For instance, Aneuvia’s ESG strategy is focused on investing in companies that align ESG factors with their long-term corporate strategy.
Second, lay the groundwork for impact assessment and measurement. Conduct “fact-finding” activities to build a solid picture of the company’s performance. Research competitors by gathering evidence on how a company is performing relative to others in the same category. Competitive analysis can be a key leverage point for influence. Investors can also narrow down tangible ESG or impact investment themes by relying on external rating agencies - a valuable source of impact measurement frameworks and data.
Third, measure and monitor the impact of investments regularly. Impact measurement allows investors to monitor progress towards objectives and identify improvement areas. A variety of impact measurement frameworks and standards have emerged in the past decade. Among many, the SDGs, Impact Reporting and Investment Standards (IRIS+), Impact Management Project (IMP), Global Reporting (GRI), and Sustainability Accounting Standards Board (SASB) frameworks are widely used. As mentioned before, due to a lack of standardization, data might not be comparable, complete, or available. Despite this, setting beliefs and policies, prioritizing objectives, allocating resources, and preparing to interact can create progressive change.
From ESG disclosure standards, company data, scorecards, and rankings to reports created by investment data providers and sustainability practitioners, investors can rely on a range of data sources to inform their understanding of ESG issues and corporate performance.
Investors and their membership organizations play a critical role in shaping (and many times, course-correcting) corporate behavior on ESG issues. Investor influence strategies often include dialogues with company management, shareholder proposals, and proxy voting, divestment, and public policy engagement. Proxy voting in particular can have a tangible impact on corporate financial and sustainability performance. Wondering why proxy voting is a driver of success when it comes to ESG investing, here’s why.
First, what is proxy voting and how does it work?
Proxy voting is a formal mechanism for investors to voice their support or concerns for a shareholder proposal. Exercising this right enables investors to essentially agree, disagree, or abstain on a vote for a shareholder proposal. Casting a vote is an effective mechanism to influence change since it allows the entire shareholder base to weigh in on an issue - it’s the power of the masses.
Proxy season tends to be in the springtime when most Annual General Meetings are held. This is often the forum for proposing shareholder resolutions on pressing issues, showing support for environmental and social shareholder proposals, and raising concerns over management or governance.
Why proxy enforces when it comes to ESG investing
Investors can leverage shareholder rights to drive a meaningful change in investee company behavior and improve the portfolio’s impact performance. Aneuvia engages with the management teams of investee companies on two aspects – quantity and quality. We ask a company to increase ESG-related disclosures (quantity) and consequently focus on improving its disclosed ESG performance (quality).
In our latest whitepaper, we explore the disconnect between a corporation’s commitment to ESG standards versus their reporting of outcomes and steps taken to meet those commitments. Given the effects of the COVID-19 pandemic, progress towards the United Nations Sustainable Development Goals (SDGs) is likely to be pushed back by another decade. Juxtaposed to this, many corporations continue to make vague sustainability commitments while chasing profits at the environment and society’s expense. Our whitepaper proves that as 2020 ends, no corporation will have achieved its zero-deforestation targets and none of the largest carbon emitters align with the Paris Agreement and remain elusive despite pressure from consumers.
This is where proxy voting can be a driver of success, transparency, and accountability. Sustainable institutional investors should vote against shareholder resolutions in demand of better ESG-related disclosures and effective social and environmental impact.