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Improved ESG Reporting & Voting – Converging Trends

Published: 27 Jul 2021

Global ESG reporting standard disclosures are coming and it is good for all investors

Consistent, clear global ESG reporting disclosures are critical for investors.  The focus on materiality and relevance is also essential. The UN Principles for Responsible Investment (UN PRI) were launched in 2006 with 63 signatories, who collectively managed $6.5 trillion in assets.  Fifteen years later the UN PRI has largely been accepted as a framework for thinking about specific concerns affecting our environment, society and corporations, as evidenced by 3,826 signatories representing $121.1 trillion in assets; an average growth in assets under management of 37%.

The UN, investors, asset owners and regulators recognize that the framework is a foundation and guide for thinking about critical issues, not an all-encompassing solution.  As the UN PRI have gained attention, policy makers globally have been evolving how to promote measurable, comparable, verifiable financial and non-financial data and disclosures.  The EU Corporate Sustainability Reporting Directive (CRSD) was a significant catalyst toward consistent global standard disclosures.

Not everything in the framework is important to every sector, industry or company. The proposed EU taxonomies bring much needed guidance and consistency for investors and ESG reporting companies.  Notably though, not every investor has the same views about the underlying issues nor do they place the same weight on the different disclosures or principles.

Increasingly, investors want their views to influence their investments and decisions taken on their behalf.  Catholics, Baptists and Muslims want to invest in line with their values. There is a MAGA ETF for people wanting to vote Republican values. Regardless of the orientation, globally standard, measurable, comparable and verifiable ESG reporting disclosures help every investor take informed decisions.

Better disclosures – implications for proxy voting

In an analysis of proxy voting trends from 2000 to 2018, Kosmas Papadopoulos points out that improved ESG reporting and disclosures are having an impact on how investors vote.  According to Papadopoulos, investors are a lot more engaged in governance, as well as social and environmental issues, especially since the great financial crisis.

Additionally, the data show a shift from investors and activists being judgmental about business practices, i.e., looking to get rid of a product or service, to looking for disclosures to frame issues within the context of the company’s long-term value and risks.

As noted in several prior blogs, the three largest index funds have significant power to sway the corporate agenda.  These passive managers are not paid to make judgement calls on the right way to vote.  Just as investors may want to influence their underlying holdings, they may want their proxies voted according to their values.

The principal-agency relationship creates a conflict of interests between investors and the passive managers.  The concentration of ownership among those managers also create potential for abuses of power and governance lapses.  One could imagine that the big three index managers might be getting increasingly concerned about litigation or regulatory risks.

Solutions, Solutions

For investors to truly be empowered, they should be able to vote directly not be represented by an agent. While still cumbersome and inefficient, technology and connectivity exist today to connect investors to their investments, regardless of whether they are held in segregated accounts or in a fund.  Evolving technology, processes and controls can simplify the proxy voting process and empower the underlying shareholders.

One critical issue, though, is understanding what the true shareholder values, engaging them and overcoming inertia to get them to vote.  In this respect, the coming global disclosures and the UN sustainability framework are useful foundations for understanding how investors think about each subject, what they value and how important it is to them.  This understanding then enables aligning material proxies with an investor’s interests and facilitates registering their votes.