Dan Kemp, global CIO, Morningstar

“As we emerge from ‘panto’ season, it is easy to see governance as the Cinderella of the ESG story – a core characteristic of share ownership that has looked increasingly dowdy in the recent past as the focus has been on her stepsisters E (Environmental) and S (Social).

“While the analogy fails because E and S, far from being ugly, are the more obviously attractive of the trio in the minds of investors as ESG investing matures, it is becoming increasingly clear that governance will become more prominent. This is due, in part, to the realisation that excluding companies on the basis of high ESG risk (a poor ESG profile) can lead to higher returns for those willing to accept that risk.

“[We are also seeing] ESG-focused investors increasingly holding businesses with poor ESG characteristics and using the privileges of ownership, such as the opportunity to engage with business leaders and vote at shareholder meetings, to encourage an improvement in the management of the ESG risks within the business. This, in turn, is likely to lower the cost of capital for these businesses and create higher returns for existing shareholders during the transition.

“The potential for improvement and progress towards that goal can been seen in data produced by Sustainalytics, which estimates and tracks the ESG management gap for each company they cover. This gap represents how well companies are managing their ESG risk and can be a key focus of engagement and shareholder activism. This is another way of saying that G will not only go to the ball but as in the original story, will be the centre of attention.”

Athanasia Karananou, director of governance and research, Principles for Responsible Investment

“It’s been another tough year for companies as they grapple with low market confidence and macroeconomic challenges. Investors will continue to look for signs of business resilience – including how prepared boards are to steer companies in this tough environment – as well as placing additional focus on capital allocation decisions and the quality of audit and assurance processes.

“We expect continued scrutiny on how well companies balance their responsibility towards their shareholders and other stakeholders with a renewed focus on corporate purpose, and more granular issues such as the role of employees. Issues around fairness, in terms of either tax payments or executive remuneration, will continue to dominate public debate and may lead to potential regulatory shifts.

“We also expect more investors to raise questions for their investee companies on how these companies are managing their public policy and political activities to support goals and obligations under the Paris Agreement and the Sustainable Development Goals. Where signs of progress are weak, investors are likely to take swifter and more decisive steps for escalation.”

Matt Crossman, stewardship director, Rathbones

“Expectations on stewardship continue to deepen, with demands for better disclosure matched by expectations of real-world impact. 2022 will see all of the industry by and large having responded to the FRC’s revised Stewardship Code, giving a clear picture of where the UK industry is.

“The main area of debate in stewardship is around delegation and responsibility for proxy voting. In some areas, asset owners are being directed to be more active in voting, with the ability to vote as you wish in pooled funds being hotly debated. There is a real opportunity for asset managers to drill deeper into their clients’ understanding on the most high-profile issues – all the while being mindful that they are stewards acting under fiduciary duty, and that fully ESG-integrated voting is a core expectation whether a client provides direction or not.

“Where pensions go, so the rest of the investment world tends to follow. We can expect more demands for detailed, client specific voting reports based on the PLSA template.”

Judith MacKenzie, head of Downing Fund Managers:

“The Taskforce on Climate Related Financial Disclosures recommendations will have broad implications for all listed companies and for many boards, the governance, oversight and management of climate risk is at the moment, largely unfamiliar territory.  Dealing with this regulatory requirement too efficiently, may mean that boards miss out on the chance to grasp some of the broader opportunities. What is clear is that easily comparable disclosures will make climate risk a central tenet of shareholder engagement and activism, far beyond the worst offenders in the dirtiest industries, bringing climate activism into the mainstream.

“Any form of disruptive change presents both risks and opportunities. The regulatory requirement to disclose might be considered a burden with limited upside and so smaller companies could be tempted to pay lip service to the exercise but thinking through the physical and transitional risks and opportunities could also throw up valuable strategic opportunities.  If never looking beyond the regulatory burden and potentially outsourcing to a consultant, its much less likely that boards will identify and grasp the strategic opportunities that climate change affords.”

Natasha Landell-Mills, head of stewardship, Sarasin & Partners

“Global institutional investors representing over $100trn in assets have been calling on companies and auditors to deliver net-zero aligned accounts since last year. As we approach COP26, governments should set a clear and urgent timeline for companies to produce accounts and audits that consider the global transition onto a 1.5C pathway.

“Furthermore, governments should require auditors to test whether company accounts adequately consider accelerating decarbonisation. When they determine the company has not done so, they should be required to report publicly where they believe the largest material risks lie.

“Rising concern over the lack of financial disclosures has prompted a growing number of investors to call for Paris-aligned accounts. While investor calls for Paris-aligned accounts have started to have an impact and demonstrated the ability of companies to produce Paris-aligned accounts, time is not on our side. We do not have years to wait for companies to voluntarily review and revise financial statements. To ensure a sufficiently rapid system-wide change, governments should mandate 1.5C-aligned accounts. The sooner governments act, the lower the cost — both financial and societal.”