A new survey reveals that investment criteria are evolving beyond financial criteria to include ESG
Institutional investors are starting to realize that, in the long run, money isn’t the only thing that counts.
According to the newly released Edelman trust Barometer Special report: Institutional Investors, investing criteria are evolving to focus not just on financial metrics, but also on corporate culture; Environmental, Social, and Governance (ESG) investing; and companies’ roles in broader society.
“A new set of investment criteria is emerging as investors take into account longer-term considerations for what drives company valuation,” said Lex Suvanto, Global Managing Director, Financial Communications & Capital Markets at Edelman.
The survey included over 500 chief investment officers, portfolio managers, and buy-side analysts across five countries (the US, Canada, the UK, Germany, and Japan), who represent firms that collectively have over US$4.5 trillion in AUM.
Eighty-nine per cent of respondents said their firm has updated its voting and engagement policy to be more considerate of ESG risks; 63% said the change was made in the past year. Environmental and social considerations are also on the rise as respondents around the world agree that they are as important as governance when it comes to investment criteria.
Public companies should also be prepared for more shareholder activism as 87% of institutional investors say their firms are becoming more interested in taking such an approach to investing. When asked whether they’d back a reputable activist investor if they believe change is necessary at a company they recommend or are investing in, 92% said they would.
Maintaining a healthy corporate culture and enforcing a corporate code of conduct at all levels of the company have a great impact on trust, said 65% of investors. And looking outside the company, 98% of investors believe public companies have an urgent obligation to address one or more societal issues. The top priorities: cybersecurity, income inequality, and workplace diversity.
Eighty-eight per cent of institutional investors said the current political climate is forcing a change in their firms’ investment strategies; trade risks were also cited by 89%. And 85% agreed that most companies do not fully recognize the new risks to their business posed by the political climate.
When it comes to sources of information, participants said a company’s CFO is the most credible, though a wide spectrum of voices — business and financial experts, regulatory agencies, and so on — are also viewed as highly credible. Social media is also gaining relevance: 98% of investors said they use social platforms like LinkedIn or Twitter to inform investment decisions on a weekly basis, and 86% say they check a company or an executive’s social media channels when evaluating a current or prospective investment.
Looking into the future, 96% of investors agreed that long-term guidance on financial performance impacts trust. This is particularly important as the bull market comes to an end, which nearly half estimated will happen in the next year and 81% said would be in the next two years.