Climate change and human capital management are on top of investor’s 2020 sustainability agenda for engaging with boards of the companies they invest in, Morrow Sodali Institutional Survey found. Majority of investors with a collective $26 trillion in assets said that they focused on climate change and human capital management when it comes to investing their money in corporations.
The survey was a combination of online surveys and one-on-one meetings with 41 respondents, which have $15.5 trillion in assets invested in active investments and $10.5 trillion invested in passive ones.
Based on Sadoli’s data, climate change is a priority and regarded as a topic with the most significant impact in the last 12 months. An overwhelming 91 percent of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures. Meanwhile, a total of 68 percent believe that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate-related disclosures.
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Besides climate change, investors surveyed stated that reputational risks are the second biggest concern, followed by human capital management, water scarcity, supply chain management, cybersecurity, data privacy, and biodiversity and ecosystem impact. Among all, human capital management has been highlighted as one of the key engagement topics by the world’s largest three index funds over the last two years.
When asked, almost every investor (91 percent) said that companies should have clear connections between the climate-related data and financial risks and opportunities if they want to improve their climate change strategy which will have a real impact. And yet, because climate change will have different impacts in different businesses, companies should tailor their disclosures to their own circumstances mainly with regard to increases in cost and potential negative influence on revenue.
Climate-related risks are foreseeable and to a large extent are manageable. Details about the process to manage the risks and opportunities related to climate will assist investors in making informed decisions about capital allocation and enable them to better price risks and opportunities over both the short and longer-term.
Human capital management is becoming an important indicator for investors when evaluating sustainable factors that could impact a company’s long-term success. This was supported by Sodali’s survey where 83 percent of investors said they were seeking more detailed disclosure from companies about human capital management.
Investors cited that the key areas for improvement are board involvement, including tone at the top and access to talent management information, followed by disclosure of health and safety indicators. Investors are also seeking to see how companies are building diverse workforces by seeking gender breakdowns and exploiting diversity benefits. Additionally, investors are seeking evidence that management is being held accountable for human capital management issues such as turnover and retention, by including it in the pay strategy.
Overall, environmental (climate) and social (human capital management, corporate purpose and corporate culture, human rights) issues are the key sustainability topics that companies will engage with boards in 2020 and, perhaps, beyond.
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