Just joining PRI isn’t enough to show ESG commitment

Calvert's John Wilson says proxy voting is a critical tool for demonstrating ESG practices and processes

Given the increased market interest in responsible investing, it’s understandable that more investment management firms have been expressing their eagerness to be seen as moving the discussion forward.

However, that talk doesn’t always lead to action. In fact, UN PRI, a leading proponent of responsible investment, recently noted the problem of asset managers with a commitment to ESG issues that’s more theoretical than pragmatic.

PRI noted that “some investors have joined the PRI, not out of any desire to incorporate sustainability into their investment practices, but to win mandates,” and emphasised how important it is to monitor asset managers’ voting records to ensure that the action matches the rhetoric. 

The organisation accurately notes that proxy voting is a critical tool because it indicates the strength of shareholder views on a designated topic, while being transparent about voting records then allows investors to see whether their asset managers followed through on any promises to vote in a specific way.

PRI plans to announce new minimum requirements this summer, which may include engagement and/or voting requirements. It’s an acknowledgement that responsible investors shouldn’t stop examining an investment manager just because it’s a PRI signatory, but rather should dig deeper to make a more informed judgement on its ESG practices and processes.

Raising the standards on diversity

One reason that progress on material ESG issues is essential for investors is that it has the potential to have a positive effect on performance. Some issues are more material for companies in specific sectors, while others are more wide-ranging. One such issue is diversity.

In research begun in 2019 and continuing currently, Calvert found in Evaluating the financial materiality of gender diversity factors that gender diversity factors are associated with improved equity returns. Companies with at least two women on the board outperformed when compared to those with fewer women on the board, and US large-cap companies with more than two women saw even greater improvement, levelling off at four women. In the US and certain like markets, similar results were found for ethnically diverse boards.

With information like that in hand, it is easier to work with companies to encourage them to make improvements. Proxy voting is a key tool in that regard. Some firms have used the power of proxy voting to hold boards accountable for their attention to diversity for three decades. This year, expectations for corporate diversity are rising, and we are more aware than ever of the value of diverse leadership for long-term corporate performance.

Diversity is just one example of an ESG issue where firms are raising their expectations. Much like investors have long sought consistent performance improvements from their investments, it is important for responsible investors to increase expectations over time to keep pace with best practices and research insights.

Proxy voting is a vital way to hold companies accountable for their commitments to board diversity. This and other tools of structured engagement can help encourage positive change.

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...