How 2021 became the year of ESG investing

Investors concerned about climate change and social justice had a record year in 2021, successfully pushing companies and regulators to make changes amid a record influx of funds focused on environmental, social and governance issues company (ESG).

Extreme weather conditions becoming more frequent and events highlighting social justice issues, such as the death of George Floyd in custody in Minneapolis, have helped make ESG a priority for investors, businesses and investors. policy makers.

A record $ 649 billion was poured into ESG-focused funds around the world through November 30, compared to $ 542 billion and $ 285 billion that went into these funds in 2020 and 2019, respectively, according to the latest data from Refinitiv Lipper. ESG funds now represent 10% of global fund assets.

Equities of companies rated for their sustainability efforts also saw gains. The MSCI World ESG Leaders Index has risen 22% so far this year, compared to a gain of 15% for the MSCI World Index.

Investors have been pushing hard to challenge companies’ ESG credentials, culminating in a landmark board challenge against oil major Exxon Mobil Corp. Support for social and environmental proposals at shareholders’ meetings of American companies rose to 32% in 2021, 21% in 2017, according to the Sustainable Investments Institute.

“It has been a pivotal year,” said Tim Smith, director of investment management firm Boston Trust Walden.

He compared this year’s votes to one of the first corporate social policy measures, in 1971, when just 1% of General Motors shareholders backed an investor resolution for the automaker to pull out of Africa from South Africa. South because of the racist social policies of the country at the time. .

Regulators have responded to the new pressure by making ESG disclosures a priority. The United States Securities and Exchange Commission (SEC) has asked fund managers what ESG classifications they use for their funds and is expected to uphold the guidelines on corporate disclosures such as carbon emissions.

The European Commission has finalized most of its rulebook on the “taxonomy of sustainable finance” on which business activities can be labeled climate-friendly. Rules will apply to certain sectors of the European Union from next month.

Of the $ 6.1 trillion in ESG funds, 59% of the money is held in Europe, the Middle East and Africa, according to Lipper, reflecting the region’s earlier adherence to the investment trend.

Inflows into European ESG funds fell in 2021, but this was more than offset by higher inflows into US and Asian ESG funds.

The main wins for ESG investors that pushed for change in companies this year included replacing three directors at Exxon Mobil, rejecting a $ 230 million salary package for General Electric Co CEO Lawrence Culp and a successful appeal to Union Pacific to publicize the diversity of its workforce. statistics.

Catherine Winner, global head of stewardship of the asset management division of Goldman Sachs Group Inc., which has supported the essential efforts of shareholders of these three companies, said investors are no longer happy with companies offering returns. to shareholders without doing more for the environment and society.

“It’s not just about shareholders; these are all stakeholders, ”she said.

To be sure, ESG investors also suffered blows in 2021. Shareholder resolutions that received significant support but failed to secure a majority included a call to reform employment arbitration procedures at Tesla Inc. and an appeal to Amazon.com Inc. for justice and fairness.

Many large private investors have warmed up to ESG resolutions, even if they did not support them most of the time. Out of 49 climate-related resolutions this year, BlackRock Inc supported 41%, up from 10% of a similar set of resolutions in 2020, according to advocacy group Ceres. Vanguard funds increased their support to 37% from 14%.

The two major index fund companies declined to comment on the Ceres report. But they have already said that companies need to have proper oversight of risks related to environmental and social issues, and that they try to be transparent about their views.

In the United States, companies can sometimes avoid voting on shareholder resolutions by seeking approval from the SEC. Thomas Skulski, managing director of attorney Morrow Sodali, said the SEC strengthened the hand of ESG investors in November https://www.sec.gov/corpfin/staff-legal-bulletin-14l-shareholder-proposals by reducing circumstances under which companies can skip votes.

As a result, next year businesses could face more challenges on operational issues, such as how they use consumer packaging or plastics, Skulski said.

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