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ESG Factors & Social Impact Investing: What Matters Most?

What ESG Investing Factors Matter Most to Investors?

Investors have increasingly been focusing on environmental, social, and governance factors, also known as ESG factors, when deciding where to allocate money & how they should interact with the companies they currently have a stake in. This trend of social impact investing and ESG investing extends across many different types of investor profiles.

For example, 88% of millennials hold the concept of ESG investing in high appeal, while 82% of high-net-worth investors feel the same, according to Legg Mason.

As such, companies need to improve on the ESG factors that matters to their stakeholders, but they also need to realize that ESG is not one-size-fits-all, especially as it pertains to social impact investing.

“ESG is a broad topic, and while fossil fuel-related issues are one of the most common considerations, a variety of other metrics exists across ESG,” notes Goldman Sachs Asset Management.

These metrics range from other environmental issues like water usage to social impact factors such as working conditions to governance issues like board composition, and these can vary based on the industry. To determine ESG ratings, MSCI, for instance, weights 37 industry-specific issues.

With so many issues to consider, it’s no surprise that 56% of ESG adopters say “there is a lack of clarity over ESG terminology within their institutions,” according to State Street.

So until there is more standardization with ESG, companies can try to better understand the factors that matter to their own stakeholders by analyzing current ESG investments along with shareholder engagement trends.

Insight from Investments

Companies can have very different shareholder bases due to factors such as size, which can affect their ESG focus.

For example, a company in the S&P 500 has large asset managers and pension funds among its shareholders, while a small private company might only have some venture capital investors. A pension fund could be more sensitive to long-term risk than a VC fund that wants to exit in a few years.

As such, the pension fund might be more focused on climate issues that pose a risk to the next generation of pension participants, while the VC fund might be more interested in a governance structure that best positions the company to grow within the next few years.

So companies should look at the ESG policies of current and prospective investors to better understand what to focus on in order to attract social impact investments. In the case of pension fund investment, a company could look at the ESG investing policies of large pension funds, which are often a bellwether for what smaller institutional investors will adopt. For example, the California State Teachers’ Retirement System (CalSTRS), one of the most prominent pension funds in the nation, has spelled out 21 ESG risk factors that it considers when making investments.

Find Trends in Shareholder Proposals

While shareholder proposals are not a panacea for understanding what ESG factors matter to investors, they can provide some direction for where investors are heading.

For example, environment-related proposals only won 11% of votes on average in 2006, but this went up to 21% in 2016, according to Proxy Monitor. Plus, environment-related proposals, led by ones on climate change or greenhouse gas emissions, were the most common type of shareholder proposal in 2016.

So by looking at these proposals, in conjunction with investors’ ESG policies, companies can start to get a more specific view of the factors that matter to their stakeholders, rather than trying to do everything at once to improve across the ESG spectrum.

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