With the heightened awareness of climate change, wage disparities, gender inequality and the like, the effects of these and other environmental and social (E&S) issues are widespread, extending as far as topics like corporate governance and investing. In fact, in its report entitled “2018 Canadian Proxy Season Review” (the Review), Kingsdale Advisors (Kingsdale) notes a belief among investors globally that “an issuer’s [E&S] activities will impact its financial returns and long-term sustainability” and furthermore, that investors view E&S issues as significant considerations when making investment decisions. The Review highlights some key trends regarding E&S governance (ESG) that appear to support these observations, including the following:
- Demographic changes appear to influence the role of E&S considerations in investment decisions. Millennials comprise increasing proportions of issuers’ shareholders and, according to a study by the Responsible Investment Association (RIA) cited in the Review, they are 65 percent more likely to consider a company’s E&S history in their investment decisions as compared to their parents. On a similar note, other studies have shown that women, whose share of private wealth is expected to double by 2024, are more “sympathetic” to ESG issues than men.
- Investors and shareholders in the United States and Canada demonstrate pronounced interest in E&S matters. In 2017, only four E&S proposals in the US passed whereas at the time of the Review in 2018, eight such proposals had already passed. Canada, where the market is comparatively smaller, is notably open to ESG proposals despite exhibiting a decline in the net volume of such proposals (as compared to 2017). Moreover, according to the RIA, so-called “responsible investing” comprised 38 percent of the Canadian investment industry and according to an RBC Global Asset Management survey, approximately 67 percent of institutional investors take ESG factors into consideration when investing or voting.
- Prominent institutional investors and activists demonstrate greater support and endorsement of ESG issues and related proposals. As prominent institutional investors and activists alike increasingly recognize a relationship between ESG and positive outcomes such as long-term returns and growth, they have become more vocal in their support and endorsement of ESG issues and related proposals.
If the above trends continue, issuers may be more motivated to ensure that they are equipped with measures to effectively deal with these proposals and to continue to appeal to investors. In the Review, Kingsdale discusses some measures that issuers may employ. For example, issuers could increase transparency and disclosure to shareholders regarding their readiness for addressing E&S issues and could reconstitute their boards to ensure that they are comprised of individuals proficient in managing and responding to E&S issues. A previous post also discusses some measures that issuers can take.
In sum, looking into 2019, it will be interesting to see how issuers adapt and respond to a changing corporate environment where investors and shareholders alike appear to be more attuned to E&S issues.
The author would like to thank Eric Vice, articling student, for his assistance in writing this legal update.