ESG In The United States And Abroad

The ESG movement is global by nature and many investors are apprehensive regarding how the current global environment may affect ESG investing. Though times may be changing, we believe ESG initiatives are still important. Even in light of proposed changes, our opinion is that domestic investors continue to view ESG investing in a favorable light.

Several initiatives, however, are underway regarding ESG. Corporate disclosure guidelines and deregulation may increase the use of nuclear and fossil fuel energy. While it is always hard to predict how changes will ultimately play out in the future, we continue to believe that the future of ESG investing looks promising as it continues to experience robust support from the global financial industry and investors.

 

The Importance Of Disclosures

Disclosures are vital in ESG investing as they provide analytic proof to many investors that a company is actually meeting their stated or proposed goals. Global attitudes have generally shifted towards greater corporate responsibility. We believe a growing number of investors may favor greater government oversight concerning ethical standards, demonstrating that ESG investing remains important regardless of the regulatory nature of the current environment in any given country.

As we wrote in “Why ESG May Finally Gain Traction,” taking ESG factors into consideration concerning both individual and institutional portfolio decisions is not a recent occurrence; however, we believe many investors are assigning it a greater role in their decisions. Corporate disclosures remain very important for those concerned about the effects of climate change, human rights abuses and/or poor company management. Our research shows companies that show concern for non-financial disclosures have a greater chance of long term success than competitors that forego these types of initiatives.

The opinions expressed herein are those of the author and do not necessarily represent the views of Northern Trust. Northern Trust does not warrant the accuracy or completeness of information contained herein. Such information is subject to change and is not intended to influence your investment decisions.

Proposed legislative rollbacks on corporate governance and climate change initiatives have roused some concerns about the impact on ESG (environmental, social, and governance) investing. The potential changes under the current administration appear to diverge from some of the other world economies concerning these issues. We believe investors have many reasons to remain confident, however, and that it continues to be beneficial for investors concerned about ESG issues to remain diligent in the beliefs that corporate responsibility, transparency and disclosure are advantageous over the long term.

As an example of the growing global scope and importance of disclosures, Canadian regulatory agencies have shown a greater interest in corporate disclosures in recent years. Firms in Alberta must disclose how they represent women on their boards and in executive positions. We believe global ESG investors prefer transparency of this nature and regardless of the political situation in one particular country, transparency in such matters has also become a priority among many investors.

In particular, U.S. investors have petitioned the SEC on more than one occasion in recent years to request that firms be required to offer greater non-financial disclosure to their stakeholders. These efforts have included the desire to disclose director nominees’ ethnicity, race and gender. Other petitions made to the SEC have included requests for public companies to disclose their annual gender pay ratios.

We believe another area of concern for many U.S.-based ESG investors is in executive pay disclosure. This disclosure is of interest not only for American investors but also for investors all over the world, with many countries having developed remuneration disclosure requirements. Germany, the European Union, the United Kingdom and Canada require compensation disclosure by law. Brazil also has a strong disclosure policy, although it is not currently required by law.

Many disclosures, however, are not used equally in all industries or all countries. The lack of uniform consensus has made it easier for non-government regulators to work together to come up with approaches that work. Some regulators believe that disclosing executive pay can be an important part of a company’s risk profile. Many companies are beginning to provide this information voluntarily even prior to official regulatory guidelines being adopted. This leads us to believe that investors continue to have interest in multiple areas including diversity and compensation. As the physical effects of climate change are felt globally, many investors are divesting from companies that produce fossil fuels. In addition to the companies that have done so, we have observed others that are contemplating similar actions or have been facing increasing public pressure to do so.

Enhancement Of Analytics For ESG Data Analysis

In recent years, many organizations have begun to look at enhanced analytics in attempting to get a more complete picture of ESG data. Although ESG data definitions can be subjective according to the individual companies, we believe that many ESG investors have begun to appreciate the importance that these standards play when making choices about which companies to invest in.

Companies that hold themselves to high ESG standards historically have continued to uphold these standards no matter the political climate. Ensuring monitoring of supply chains monitoring and corporate governance have been among the various ESG related actions management teams have undertaken to potentially enhance a firm’s long-term financial success.

We believe that despite early concerns, some ESG investors have seen their investment portfolios benefit from active analysis of corporate ESG disclosures. In fact, our analysis shows that some investors view ESG investing as a possible way to protest policy changes and could prompt some investors to include companies with high ESG standards in their portfolios.

We continue to believe that many millennial and female investors have started taking advantage of ESG related investment options.

The Future Of ESG Investing

Even though potential changes are on the horizon, we believe the outlook for ESG investors still looks promising. Investors who are concerned with investing in socially responsible companies continue to have a myriad of investing options. Investing in companies that practice social responsibility may be one way to help play a role in changing the regulatory environment.

The continued desire for greater disclosure by many governments and transnational entities continues to grow. In light of this expectation, we believe companies are likely to either continue to provide greater disclosure or even begin to provide ESG disclosures prior to regulatory edicts. We believe the trend towards greater ESG disclosure will continue to be spearheaded and supported by investors and management teams.

Abdur Nimeri, Ph.D., is senior investment strategist for FlexShares Exchange Traded Funds.