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Impact Investing

IPE special report May 2018

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Shareholder pressure fails to promote sustainable practices – survey

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Barely one in 10 companies feel compelled to improve their sustainability record, despite pressure from institutional investors, a study by the UN-backed Principles for Responsible Investment (PRI) has found.

The study, which saw the PRI work with Accenture on its annual CEO survey on sustainability, also found that fewer than one-quarter of responding firms saw large shareholders as key to guiding their approach on the matter.

“In the context of a rising focus on sustainability as an essential part of core business, and a driver of future success, the continued absence of the investor as an influential stakeholder is a surprise,” the report said.

“The lack of movement in the influence of investors could be best described as ‘the dog that didn’t bark’.”

However, the report noted that longer-term, more concentrated investment mandates could be one way of improving their ability to be heard.

Fiona Reynolds, managing director at the PRI, told IPE such an approach would allow for “deeper engagement”.

“Rather than trying to have a broad engagement with hundreds and hundreds of companies, you can have very meaningful dialogue with fewer companies and really get into the issues,” she said.

She added that the PRI would be putting out its discussion paper on such mandates in the coming months, but said the organisation had been looking at the role of long-term mandates not only in improving engagement but also in driving long-term behaviour for managers, pension funds “and ultimately companies, as well”.

The report argued that, with 80% of chief executives considering sustainable practices as a key competitive advantage, it should be viewed as a cause for concern that the issue is not yet part of analyst calls and engagement with investors.

However, despite 80% of chief executives viewing sustainability as key to the competitive advantage, only 14% of investors questioned by the PRI said they viewed investee companies as being boosted by said advantage.

Respondents to the survey included the UK’s Pension Protection Fund, Dutch pension manager PGGM, Allianz Global Investors, the Canada Pension Plan Investment Board and several large Australian superannuation funds, including AustralianSuper.

Neither did shareholders and chief executives agree on the importance of sustainability to various sectors, such as banking, mining, utilities and infrastructure and transportation.

While only 57% investors thought sustainability was an important issue for the chemicals industry, 97% of company executives saw it has important.

Only three-quarters of investors, meanwhile, saw sustainability of infrastructure and transport as key, compared with 98% of chief executives.

In fact, across the 11 sectors chief executives were questioned on, only in one – electronics and high tech – did fewer than 90% agree that sustainability was vital, compared with seven areas that saw 90% or more of investors agree.

Reynolds suggested the relative lack of concern for sustainability in the chemicals sector stemmed from its highly regulated nature, such as the safety framework required when moving chemicals.

“That’s not to say people don’t want to engage with those companies,” she said. “But, by the nature of the work, it does have to be highly regulated.”

The survey also found that investors often only approached sustainability through the prism of risk mitigation.

It quoted the PPF’s CIO, Barry Kenneth, as arguing that sustainability was “one of a number of risks” examined by the fund.

“If a company falls south on sustainability, there can be an impact on value and investment,” he said.

For more from Fiona Reynolds on the PRI and its impending governance restructure, see the current issue of IPE

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