Institutional investors increasingly likely to divest on ESG grounds

Like insurers, Canada’s institutional investors are examining how environmental, social and governance (ESG) factors weigh into their operational decisions.

A new EY report on global institutional investors that includes Canada showed 74% are more likely to divest from companies with poor ESG track records. What’s more:

• 89% of institutional investors that responded are calling for mandatory global ESG reporting standards; and
• 86% will invest in companies that have a low carbon footprint.

Thibaut Millet, who leads EY’s Canada climate change and sustainability services, noted COVID-19 served as a catalyst to place focus on ESG and is “putting pressure on both companies and investors to assess risks effectively.”

The social aspect of ESG is proving particularly important for insurers writing directors and officers (D&O) liability insurance. In addition to well-publicized issues around diversity and inclusion, there’s also the likelihood of increasing litigation relating to ESG, which in turn leads to more D&O claims.

“Generally speaking, you are seeing a bit of an uptick in D&O claims across the social pillar,” Ralph Banbury, management liability underwriter with CFC Underwriting told CU in an early November interview. “Social encompasses so much. For example, it looks into employee welfare, it looks into the supply chain, and [extensively into] cybersecurity. These three points are hugely important to companies, and the C-suite and directors will be incredibly focused on ensuring that these three points are top of their agenda.”

Banbury’s views are supported by an October report from Allianz Global Corporate & Specialty (AGCS) that noted improperly handling ESG issues could result in “bad news” for a company’s market and share price, and potentially lead to legal or regulatory action. “ESG topics can pose a significant D&O risk for companies and their insurers,” it added.

Further, the report said, “Growing concerns about social inequalities are also leading to new requirements for businesses around diversity, pay and supply chains.”

On the investment side, EY’s report noted that, despite focus on ESG performance, only 49% of survey respondents have acted to update their investment policies and frameworks, and just 44% have revamped their risk management strategies.

“In the absence of a clear and consistent regulatory framework, investors looking to build an ESG-driven culture should start by reviewing current investment strategies for individual funds and portfolios and updating processes, systems and controls, while putting bold and forward-looking data analytics strategies in place,” said Millet.

EY’s report noted half of those it surveyed don’t believe companies are reporting adequately on financially relevant ESG issues, such as revenue growth or required capital and risk.

“Uniform global standards are critical to build accountability and deliver transparent measurement and high-quality disclosures around ESG performance,” said Millet, “which in turn can underpin good business management and help to build and preserve stakeholder trust.”

Although there’s no global benchmark for ESG reporting, the AGCS report noted legislation is evolving.

“Companies, their D&Os — and current and future D&O insurance underwriters — need to be aware of ongoing global ESG matters in order to adequately assess potential perils and how they can manifest in terms of potential liability,” its report said.

Feature image by iStock.com/schankz