Australasian institutional investors have seen a clear link between market performance and better corporate implementation of environmental, social and governance (ESG) standards.
In its inaugural ESG survey of 20 institutional fund managers in Australia and NZ, wealth management firm, Jarden, found the vast majority of listed companies appear to benefit from adopting a more responsible attitude to corporate behaviour.
Michaela Jamison, Jarden head of ESG research, said in a release: “More than 90% of respondents believe companies that execute better on ESG strategy either are currently being rewarded, or if not they will be rewarded, in the multiple the market is willing to pay in the future.”
More than half of respondents also “very much” wanted companies to include ESG targets in executive pay packages while a further 40 per cent “moderately” supported the concept.
“Unfortunately, there are few companies with these incentives in place,” Jamison said. “We see this as an area for improvement that would also assist with the credibility of ESG targets.”
She said survey respondents ranked risk management as the core issue for companies to weigh up when putting ESG strategies into place.
“Of the investors surveyed, 27% believed companies are focused on ESG for risk mitigation over growing brand and profit and 47% believed companies were evenly focused on ESG for risk mitigation and as an opportunity to grow brand and profit,” Jamison said.
And while climate change emerged as the unchallenged number one concern, investors are less united on the relative importance of other ESG goals.
Close to 95 per cent of those surveyed put climate change among the top three issues while half voted it as the “most material ESG risk in their investable universe”.
Aside from climate, investors expected companies to focus on ESG compliance in supply chains and improving corporate culture through good governance.
Firms also need to lift the level and quality of ESG communication, the survey found, including the release of more data on net zero strategies, showing concrete results and reporting in a standardised fashion.
Furthermore, Jamison said the study reveals a “clear mismatch between how well respondents view companies are reporting and communicating on ESG versus how they are executing on it”.
About 85 per cent of investors rated companies as good on ESG reporting but only 10 per cent said corporates executed those strategies well.
“Interestingly, none of the respondents cited either as ‘excellent’, indicating there is clearly room for improvement on both of these fronts and particularly on execution,” Jamison said.
Jarden intends to conduct the survey on a regular basis to follow ESG trends in Australia and NZ from the perspective of institutional investors.
“We plan to conduct a similar survey with non-executive directors to assess where interests are or are not aligned and track this over time,” Jamison said.