Q: Why is environmental, social and corporate governance important for boards?

A: It comes down to first principles: The board is responsible for providing oversight over the risk management systems of the company. As the Samarco catastrophe and the financial planning scandals indicate, ESG issues can present material risks to the business, much in the same way as other risks like credit risk or market risk. Boards need to be confident that the company is not unduly vulnerable to these risks.

Q: What trends are you seeing?

A: ESG integration throughout the investment process is a hot topic amongst Australian institutional investors. And it’s not just proxy voting where ESG issues are considered.  Investors are incorporating ESG risk factors when constructing portfolios, conducting investment analysis and making investment decisions, selecting service providers and determining engagement targets.

Q: Why does tension exist between boards and consultants?

A: It depends on the circumstances. Sometimes there can be disagreements on the materiality of the risk factors in question. Other times there can be a lack of clarity about, on the one hand, the process by which boards manage ESG risks, and on the other hand, the process by which proxy advisors and other consultants determine their recommendations. And occasionally it may boil down to personality conflicts on either side. Regardless of the reason for any tension, we believe it is crucial for boards, investors and service providers to maintain a constructive dialogue to facilitate mutual understanding, if not agreement.

Q: Is there more active engagement today?

A: We’ve seen a steady increase in investor and corporate engagement over the past few years. What’s interesting is that there are a lot more touch points these days, whether it’s between the portfolio manager and the CEO or CFO about financial performance, or between the governance expert and the Chairman of the Board on corporate governance matters, or even between the ESG expert and the company’s sustainability professionals on ESG issues.

Q: What other complaints or problems exist?

A: Some market participants claim that investors blindly follow the recommendations of their advisors. This is most commonly alleged for proxy advice but is also applicable to ESG risk analysis factoring into investment decisions. When it comes to proxy advice, it is our experience that our clients employ a myriad of strategies to integrate our research and recommendations into their decision-making process.

Q: What’s the solution?

A: There’s no silver bullet, but companies may wish to ask their investors how they integrate voting and other advice into their decision-making process, which can help inform a company’s investor engagement strategy.

Q: What does the future hold?

A: Active ownership is increasingly front of mind for a large portion of the investor community. This is especially relevant for passive investors, who don’t have the ability to do the ‘Wall Street Walk’ if they have material concerns with a company’s exposure to ESG concerns. It is incumbent on company representatives, whether they are board members or executives, to be on the front foot in understanding how investors look at ESG risks.