Evolving regulatory requirements and the pressure to deliver sustained returns in an extremely competitive environment has led investors to increasingly monitor extra-financial factors alongside financial performance.
The integration of environmental, social and governance (ESG) in investment decisions has moved from a ‘nice to have’ to a basic requirement for many asset owners. Asset managers are now held accountable by their clients to evidence how they use ESG to identify opportunities, manage risks and have an impact. Moreover, for investors, stewardship is no longer just about voting. It means monitoring and engaging with companies on issues ranging from capital allocation to climate change.
For companies, on the otherhand, the challenge is to understand how each investor exercises their rights and responsibilities which are not yet homogenous. Boards and management teams are now under constant pressure to demonstrate how their strategic decisions aim to create value for stakeholders while reducing their negative externalities. Failure to effectively communicate the long-term impact of those decisions makes a company more vulnerable to threats posed by investors, competitors, and other market participants.