Institutional Investor Survey 2021

Executive Summary

We are delighted to publish Morrow Sodali’s sixth annual Institutional Investor Survey (IIS), which canvasses the views and opinions of more than a quarter of the world’s assets under management [1] at a globally significant point in time.

Against the backdrop of the COVID-19 pandemic, Environmental, Social and Governance (ESG) impacts at listed public companies have been propelled to the forefront of investors’ minds as they assess the management of risks and opportunities, operational resilience, and shareholder value creation through a period of unprecedented market uncertainty and turbulence.

As is widely reported, the trend of capital inflows into ESG-oriented investing has exploded reaching a record high of USD 1.65 trillion in 4Q2020, up almost 29% from the third quarter. [2] The COVID-19 pandemic has contributed to the acceleration of ESG investing. Importantly, the pace of investment in sustainable funds is expected to continue to increase in the race towards a net zero carbon economy by 2050.

For this reason and following a global health crisis, the interest and appetite of investors, especially asset owners, to hold boards and companies accountable for their performance against “nonfinancial” ESG criteria is set to match, and in some cases exceed, performance against traditional financial measures.

Therefore, understanding and thoughtfully responding to the concerns that are weighing on the minds of investors, it is necessary now more than ever to build investor trust and support as companies and their leaders are faced with navigating unique challenges. We hope that the findings of our IIS 2021 contribute to that objective.

It should not come as a surprise that over the past year, COVID-19 was identified by our survey as one of the top reasons prompting investors to engage with companies. With the mounting economic and operational pressures caused by the pandemic, investors and other stakeholders are asking companies to articulate their “Corporate Purpose”, mission and values as a core part of how they conduct business.

Compensation to senior executives has also come under specific scrutiny as a result of the pandemic. Investors require cogent explanations where incentives have been paid, especially if government “handouts” have been taken and where financial performance has suffered. This scrutiny will continue into 2021 as company revenues and profitability continue to be affected by the pandemic.

We note that a number of identified survey trends over the past few years have continued, including investor preference to engage directly with the board on environmental and social issues. Undeniably however, investors rank climate risk as the most important ESG issue and engagement topic for the second year running. Expanding on data gathered from last year, investors are particularly interested in understanding ESG in the context of a company’s business plan and the identification of clear connections to financial risks and opportunities in a company’s climate-related disclosures.

The growing importance of climate risk has now clearly translated into investor willingness to hold companies and boards accountable through the filing and co-filing of ESG-related shareholder resolutions. This notable shift in attitude marks a turning point in the relationship between companies and shareholders where the failure of polite dialogue to drive change will directly impact investment and voting behaviours.

Interestingly many investors stated to be in favour of a “Say on Sustainability”. While a number of companies worldwide have voluntarily adopted non-binding “Say on Climate” voting resolutions, the survey suggests that in the near future “Say on Sustainability” voting resolutions may also be on the table. However, in terms of a “Say on Climate”, there are notable differences depending on the region; on the one hand a number of European, Canadian and Australian corporations have been open to the idea, but on the other, there has been significant push-back from US companies and investors. It goes to say that similar differences could be expected concerning any future “Say on Sustainability” campaigns.

These, and other findings and insights can be found in our IIS 2021.

Finally, we would like to sincerely thank all institutional investors who gave their time to contribute to this survey.

About the Survey

For the IIS 2021, a total of 42 global institutional investors, managing approximately USD 29 trillion in Assets Under Management (“AUM”) voluntarily participated in the survey. The data is therefore representative and can be extrapolated across the total global investable universe.

Responses were gathered from direct conversations or via an online survey. Participating investors represented a diverse spectrum of funds in terms of investment style, profile, size and geographical location, among other attributes. The data and findings will therefore be of interest to a wide range of listed companies across all sectors, boards of directors and other capital market stakeholders.

To enable year-over-year comparisons, a number of survey questions are repeated or follow similar themes. In addition, new questions are asked that reflect topical developments and themes.

Our Commitment to the Company-Investor Relationship

We carry out this survey to find out what is really important to investors when analysing companies.

We conduct this annually at our own expense because we are committed to enhancing the relationship and understanding between companies and investors. It also informs our work helping client companies with shareholder engagement and a broad suite of corporate governance services. This also supports company-investor relations that can be made more fluid, efficient, and effective; companies know what to focus on and investors receive the information they need.

Ultimately what underpins Morrow Sodali’s activities is facilitating dialogue and understanding between companies and their institutional shareholders so they can achieve the best outcome possible. This survey forms part of that endeavour.

Key Findings

A total of 19 survey questions were asked across four categories:

• Company Engagement
• ESG & Sustainability
• Remuneration and Voting
• Shareholder Activism

Anecdotal feedback and opinions were also invited and analysed as part of the survey findings and observations as outlined in the table below:

A. Company Engagement

1. Investors are giving ESG more focus when engaging and investing, and a significant majority are taking ESG into greater consideration when voting.
2. Key drivers for increased ESG focus are the links to financial performance, followed by legislative changes and client interest.
3. Investors cite the discussion of ESG in the context of a company’s business plan as the key basis for effective company engagement.
4. Climate risk remains the number one engagement priority closely followed by human capital management, remuneration and board composition. COVID-19 was also a top engagement priority as were cybersecurity and supply chain management.

B. ESG and Sustainability

5. Climate change is very important to the investment decision-making process.
6. Every surveyed investor reviews a company’s climate-related disclosures.
7. The top three improvements investors are seeking from climate-related disclosures are clear links to financial performance, the time horizon to impact on strategy and the disclosure of metrics, targets and achievements.
8. Companies are expected to disclose their “Corporate Purpose”, and engagement with the board was given as the top action in the absence of disclosure.
9. TCFD was overwhelmingly the most popular ESG reporting framework, followed by SASB and then in-house proprietary frameworks focused on material topics.
10. Many investors support an annual “Say on Sustainability”. However, there are also many who consider the option to vote against the reelection of directors as sufficient to make their voices heard on this topic.

C. Remuneration & Voting

11. ESG factors should be considered when designing executive remuneration plans.
12. For both short and long-term incentive plans, a weighting for ESG metrics and targets between 5% and up to 25% was most supported.
13. To avoid misalignment between pay and performance, companies should be wary of paying executive bonuses when severely impacted by COVID-19.
14. Large incentive payouts lacking performance hurdles and the payment of bonuses where COVID-19 impacts were severe, were the top two indicators of pay and performance misalignment that would result in negative votes on “Say on Pay”.
15. With COVID-19, the appropriateness of dividend payments when faced with liquidity problems, big lay-offs, taking government subsidies and dilution of share capital were ranked as concerns relatively equally.
16. A majority of survey respondents oppose the adoption of loyalty shares.

D. Shareholder Activism

17. Investors prefer to influence boards by engaging with directors, followed by direct engagement with management. Although ranking lower, collaboration with other investors and voting against directors are also viable influencers.
18. After financial performance, poor strategy, weak governance and misallocation of capital were the highest-ranking reasons for supporting an activist.
19. Lack of responsiveness to investor support for ESG resolutions and material ESG controversies could also result in support for an activist.
20. A clear majority are prepared to file or co-file an ESG-related resolution.

The complete publication, including footnotes, is available here.

Endnotes

1Global AUM = USD 110 trillion: https://www.consulting.us/news/5332/asset-and-wealth-management-industry-to-grow-to-147-trillion-by-2025(go back)

2Morningstar, Global assets in sustainable funds hit record high of USD 1.65trn: https://www.internationalinvestment.net/news/4026468/global-assets-sustainable-funds-hit-record- usd-65trn-morningstar(go back)