Investors Pressure Companies to Improve Sustainability
Investors are increasingly focusing on sustainability, and they are putting pressure on companies to change accordingly.
This pressure comes from many directions, including asset managers who own equity and often act on behalf of underlying investors to challenge companies on environmental, social and governance (ESG) issues, such as through proxy voting. It also comes from both institutional and retail investors whose collective action in terms of investment choices and outspokenness ends up making a difference.
The Rise of Sustainable Investing
As more investors allocate money based on environmental factors, companies face more pressure to focus on sustainability in order to attract investment.
Since 2014, assets under management of United Nations Principles for Responsible Investment signatories, who commit to incorporating ESG into investment analysis and decision making, have jumped from $45 trillion to $62 trillion, a 38% increase.
Positioning a company to receive this investment can help boost demand, thereby possibly creating a rise in share prices and creating an investor base often committed to working with companies to improve on these factors.
The Rise of Divestment
On the other side of the coin, if enough investors screen out certain companies or specifically choose to exit current investments because of their environmental actions, then they risk a drop in share prices and access to capital.
For example, in 2014, coal company Peabody Energy noted in an SEC filing that divestment of fossil fuel equities along with pressure from these investors on lenders to limit funding to fossil fuel companies “may adversely affect the demand for and price of securities issued by us, and impact our access to the capital and financial markets.”
As it turns out, Peabody wound up filing for bankruptcy protection this past year.
In all, divestment from fossil fuel companies has reached $5 trillion, according to Arabella Advisors. Even the Rockefellers, heirs to an oil fortune, have committed to divesting from fossil fuel investments for their philanthropy the Rockefeller Family Fund. This is in large part due to investor pressure to improve sustainability.
An Impetus for All Companies
Public companies are not the only ones at risk of losing out on potential investment, as the focus on ESG is growing in other asset classes too, such as private equity and fixed income. This trend also means that smaller companies will likely face more pressure too, as even receiving loans could become more difficult without acting more sustainably.
Additionally, companies can face sustainability pressure from investors even when those investors do not have the power to make immediate changes. That’s because investors can raise awareness that builds up over time, and larger investors can eventually join in, such as how Fidelity is now taking its underlying investors interest in environmental and social matters into account for its proxy voting, as Reuters reports.
So as companies look to grow and be on the same page as investors, they need to take sustainability into account.
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