Responsible Investment

ESG engagement: what’s fuelling future conversations?

Over the past two decades, investor engagement on environmental, social and governance (ESG) issues has evolved from a niche practice to a mainstream activity.
November 2020

Responsible Investment Team

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Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

As pioneers, we’ve engaged 5,500 companies across 87 countries during this evolution – and counted over 3,700 instances of positive change as at 31 December 2019. While we are proud of our impact so far, we are well aware that there is still much to do if we want a chance of securing a sustainable future for us all. This decade is critical for achieving the United Nations Sustainable Development Goals (SDGs), as well as the Paris Agreement goal of limiting global warming to well below 2°C. Below are some of the key shifts we expect to see in terms of engagement as investors strive towards these goals.

Measuring impact

In the coming decade, we believe engagement will increasingly focus on both financial returns and sustainability outcomes. But while we know what financial returns look like, how can we measure sustainability returns?

The SDGs are a key reference point for measuring the impact of engagement. They are 17 goals and 169 associated targets, providing a useful tool for companies and investors to be able to contribute to achieving a more sustainable future by 2030. The framework has created a common language between stakeholders, and we are seeing that have a positive impact within our engagement.

 

Working together for systemic change

A fundamental shift in perspective that we are already starting to see, and expect to accelerate in the coming decade, is from viewing stewardship as about the relationship between investors and individual companies towards looking more holistically at our responsibilities for shaping the market and economy as a whole. Climate change is perhaps the most obvious example of a systemic risk which investors can help to address, but it is not the only one. Critical issues such as ocean health, biodiversity and public health cannot be addressed by engagement with companies alone.

Implementing this practice means a sharper focus than in the past on public policy, but also widening our perspective to build relationships with other stakeholders, including NGOs and academic experts. A collaborative approach between investors is key to making this a success, both to muster the resources necessary to make these changes and to present a unified voice which improves the chances of successful influence.

 

Investors across the world step up

Although engagement with companies in Asia and other emerging markets has expanded over the past decade, it has been almost exclusively led by developed-market investors, primarily in Europe and the US. Given the increasing introduction of responsible investment regulations, guidelines and practices, we expect to see active ownership become a much stronger feature of the local investor agenda in other markets this decade.

 

Decade of climate action

Progress across the whole sustainable development agenda is important in the 2020s, but there is particular urgency to climate action. Although the COVID-19 pandemic has led to a short-term reduction in emissions, the transformation of underlying economic and energy systems remains far short of what is needed to achieve the Paris agreement goal of a well below 2°C world. Achieving net zero carbon emissions by 2050 will not happen if it is left to governments alone – robust action by investors and corporates is essential. The relentless rise in greenhouse gas emissions must be reversed this decade.

Whilst the scale of the issue is daunting, evolving forms of engagement are emerging to address it. Collaboration is taking place at an unprecedented scale through the Climate Action 100+ initiative. Investors are also increasingly expressing their dissatisfaction with companies failing to address climate issues by voting against management resolutions, such as opposing Board directors.

 

The ‘S’ factor

The ‘S’ – social – of ESG has been historically difficult to define and quantify. But the COVID-19 pandemic has profoundly impacted society and shaken our assumptions about the way we live. It has also painfully exposed social and economic inequalities. Against this backdrop, social issues are now among the most pressing issues for companies globally. It has also become clear that all elements of ESG are fundamentally linked and of equal importance. This decade, we expect investors and data providers to overcome the challenges that have prevented the analysis and integration of social factors to step up their engagement, while carefully balancing interconnections with E and G issues.

 

Final thoughts

We may be celebrating two decades of running our investor engagement programme – but we’re by no means stopping there. Throughout this vital decade and beyond, we will continue to engage for positive impact in the world around us, and to ultimately make finance a force for good.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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