What could have stopped Royal Bank of Scotland from embarking on a boomtime deal binge 20 years ago that eventually resulted in the largest corporate blow-up of the global financial crisis?
Richard Buxton, head of UK equities at Merian Global Investors, offered a simple solution while speaking at a panel debate at Edelman’s London headquarters to discuss the findings of our latest Trust Barometer Special Report into the views of Institutional Investors.
“If half the board of Royal Bank of Scotland were women they wouldn’t have pursued this crazy macho acquisition strategy,” explained Buxton. “Women don’t do silly macho things.”
What Buxton was talking about is Governance – the third letter of the three-letter acronym that has become central to every conversation about investment of recent years: ESG.
While some CEOs still like to roll their eyes at the mention of the phrase, or see it is part of a leftist conspiracy to bring down capitalism, investors are crystal clear on its importance. In fact, they believe that the businesses who get ESG right also tend to perform better.
Edelman surveyed more than 600 fund managers in six different geographies (U.S., Canada, UK, Germany, the Netherlands and Japan), in researching our Trust Barometer Special Report into the views of Institutional Investors. Some 58% of our respondents said they believe that companies that disclose their ESG risks also perform better. Among the UK investors, that figure stood at 66%.
Seemingly in light of this correlation, 61% of our global investors said they are allocating more of their funds towards companies that excel against ESG metrics.
“I’m a Wharton MBA for my sins,” explained Marisa Drew, Head of Impact Finance at Credit Suisse during a panel debate at Edelman’s London headquarters on December 10. “When we were taught Finance 101 we really were taught that the purpose of the body corporate is to make profits for shareholders. It was pretty monochromatic. I think there’s a much greater recognition now that there was a missing link there.”
When we asked investors what they considered to be the key factors that make for a good long-term investment, they pointed to the growth profile of that company and the risks that stand in the way of that growth. When we probed a little further into the specific risks that worry investors, all of them could be bucketed into one of the three criteria of ESG.
Unsurprisingly, investors believe it is risky for companies to ignore the climate debate, to turn a blind eye to the divides in society or to operate without proper checks and balances in place.
There was a stern reminder from Simon Dingemans, the new chairman of the Financial Reporting Council and former chief financial officer at GlaxoSmithkline, that all of this should be happening anyway. Under Section 172 of the UK Companies Act 2006, British companies are obliged to think about more than just shareholders. He plans to ensure that this is better enforced.
"When we say 'risk" we do mean this area as well, and how it integrates into your business," said Dingemans. He wants to see “facts and figures” on ESG risks he added – and much more than has been offered previously.
“Investors have a big role to play and it’s why we put into the new update of the stewardship code some very specific asks of investors as to ‘how are you engaging with companies to make them publish and articulate and describe their strategies in all of these areas.”
Dingemans’ message has been received by the investor community. Some 57% of the UK investors polled by Edelman said they are hiring more people to do deal with ESG risks. A staggering 84% even claimed they would consider accepting a lower rate of return from a company that offered better compliance with ESG risks or impact investment factors.
Dame Helena Morrissey, the seasoned fund management CEO and a member of Edelman’s UK advisory board, disputed this finding. No fund offering sub-par returns will ever get off the ground, she argued. Yet many impact funds that have been launched have performed well. By avoiding unacceptable sectors such as tobacco and mining, their returns were strong.
In terms of enforcing compliance with ESG factors, the panel was split on the best plan of attack. Buxton argued that it can be powerful to hold shares and argue for change. Morrissey retorted that the ultimate sanction of selling a company’s shares was often a tool needed in the debate.
“You have to show that ultimately you either vote against [the board] or you divest, otherwise it just becomes empty words,” she said.
Buxton also pointed out that there needs to be some flexibility to governance; an acknowledgment that sometimes the box-ticking rules may not quite be right – expressing sympathy with JD Wetherspoons boss Tim Martin.
“You know what you’re investing in if you’re investing in Wetherspoons,” he said. “To invest in it and say you don’t like the governance arrangements? Come on guys.”
Marisa Drew made a similar appeal to pragmatism in the context of energy transition. “You can’t turn off the taps on oil and gas today,” she said. “If you did, 80% of the world would be without electricity. But we need to help these companies transition faster.”
That, argues Morrissey, is partly where a diverse board can be a good starting point.
“Identity, diversity, whether you are a woman or a man, or black or white, is more a starting point to bring different perspectives,” she argued. “Putting more women on the board is a bit of a blunt instrument to just shake open the boardroom.”
The full survey findings can be read here: