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Feb 11, 2021

ESG and diversity among keys to success, investors say

Almost half cite importance of integrating ESG opportunities into strategy

Investors say addressing ESG matters and board composition will be among the most important factors in determining companies’ futures in the coming years, according to a new survey from EY.

Asked to name the three biggest drivers of strategic success over the next three to five years, almost half (47 percent) of those surveyed mention integration of material ESG opportunities into strategy. The other top-rated answer, also given by 47 percent of respondents, is quality of strategy and ability to execute. That is followed closely by diversity of the board, management and workforce (42 percent) and quality of the board and overall governance (38 percent).

Some of the less-frequently given answers are workforce transitions such as virtual working and automation (28 percent), workforce development and training (23 percent) and alignment of culture to drive strategy (23 percent).

Conversely, climate risk and natural resource constraints is most commonly cited – by 52 percent of respondents – as one of the three biggest threats to strategic success over the next three to five years.

As research into what investors expect from the 2021 proxy season, EY spoke with governance specialists from more than 60 institutional investors representing more than $38 trillion in combined assets under management.

The findings emerge amid growing evidence that, far from dimming interest in ESG, the Covid-19 pandemic and economic fallout have focused investors’ minds on the importance of a range of issues including climate change and human capital management.

‘[I]nvestors believe that if companies are effectively monitoring and managing ESG factors, those efforts can uncover new strategic opportunities and business model needs, position the company to be more agile and competitive as sustainability risks and stakeholder demands continue to change, and strengthen the company’s social license to operate,’ the authors of the EY report write.

The protests sparked by the disproportionate impact of the Covid-19 pandemic on people of color and the deaths of African Americans at the hands of police officers have also shone a renewed spotlight on racial injustice and inequity and have increased pressure on companies to look at diversity and inclusion.

For example, State Street Global Advisors (SSGA) CEO Cyrus Taraporevala last month announced proxy voting practices intended to ensure companies are transparent about the racial and ethnic composition of their boards and workforces.

According to these practices, SSGA this year will vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their board. Next year it will vote against the chair of the compensation committee at companies in the S&P 500 that do not disclose their US Equal Employment Opportunity Commission’s (EEOC) EEO-1 survey response.

‘The preponderance of evidence demonstrates clearly and unequivocally that racial and ethnic inequity is a systemic risk that threatens lives, companies, communities and our economy – and is material to long-term sustainable returns,’ Taraporevala writes.

The EY report authors write: ‘If companies are not leading on social change and responding to the national conversation on race, there is an opportunity cost: a failure to act could impact the company’s relationships with employees, customers and other stakeholders.’

Disclosure around human capital management has become an important issue for investors and governance teams since the outbreak of the pandemic and social justice protests. Asked to name three to five disclosures that would be of greatest value in making assessments, by far the most common response – cited by 85 percent of respondents – is workforce diversity in terms of gender, race and ethnicity.

US companies must file EEO-1 reports with the EEOC and some investors have for decades been asking to see them but they have largely met resistance until now. That is starting to change, most notably through a campaign by New York City comptroller Scott Stringer last year that led to dozens of S&P 100 companies agreeing to release the data.

The next most-frequently named disclosures in the EY survey are pay equity (58 percent of respondents), workforce stability, such as turnover rates (50 percent), number and type of employees, such as full-time, part-time or seasonal (43 percent) and workforce health and safety (32 percent).