The active environmental, social and governance (ESG) dialogue between investors and companies has seen a dramatic growth in importance in recent years. This will certainly continue in 2019, but which topics will be front of mind for the investor dialogue?
Among the many sustainability focus areas for investors, a top three can be identified. First, a dialogue about climate change action with high carbon-emitting companies is here to stay. Next to this, single-use plastic is quickly emerging as a solid topic for engagement due to growing awareness about plastic pollution and upcoming regulation. Lastly, the Sustainable Development Goals will gain solid ground as a common framework and a common language in the engagement dialogue between companies and investors.
1. Focus on climate change action remains a key priority
Climate change will remain an important topic for many industries. Fossil fuels and energy-intensive industries still account for about 70 per cent of greenhouse gas emissions. Companies in high-emitting sectors, such as oil and gas, electric utilities and chemicals, are therefore key players in the energy transition. The car and real estate industries are also significantly affected by this development; buildings account for 30 per cent of energy use globally. Recently, many reports were published to show the need for regulators and the private sector to act on this issue. Stronger regulation is expected, and companies will need to deal with it.
It is important for investors to take the risks and opportunities of climate change regulation and developments into account in their investment process. Next to this, structural engagement between investors and companies in high-emitting sectors in investor portfolios will contribute to requesting further change.
As part of the biggest ever collaborative engagement between investors – Climate Action 100+ – investors make their expectations clear. In this initiative, companies are requested to implement a strong governance framework that clearly articulates the board’s accountability and oversight of the climate change risks and opportunities that they face. Companies are also asked to integrate climate risks into their regular risk management framework in order to identify, assess and manage the transition and the physical risks.
Furthermore, companies are expected to implement measures and take action to reduce greenhouse gas emissions. This includes investments in clean technologies and initiatives that can meet emission-reduction targets. Finally, companies are asked to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in their reporting to shareholders and other stakeholders.
“THE PLASTIC WASTE PROBLEM, INCLUDING THE OCEAN LITTERING THAT CREATES A PLASTIC SOUP IS GROWING, LEADING TO INCREASING CONSUMER AWARENESS AND REGULATORY PRESSURE. THIS ALSO CONTRIBUTES TO THE EXPECTED RAPID GROWTH IN THE REDUCTION OF SINGLE-USE PLASTIC IN THE ENGAGEMENT EFFORTS OF INVESTORS”
The number of shareholder proposals on climate change action will continue to be considerable and many of those proposals will be targeted at the most carbon-intensive sectors. The information coming out of engagement programmes with companies in carbon-intensive industries can be incorporated in the investment decision-making processes of investors. The materiality of ESG issues on the sector and companies’ performance on these issues, will be assessed.
2. Reduction of single-use plastic: an emerging topic for investors
The economic progress that has been made in the past comes at a price that is currently not visible in the profit and loss accounts and balance sheets of companies – the external costs of it.
The number of people on our planet is continuing to rapidly increase from 7.5 billion people today up to an expected 10 billion people in 2050. Next to this increase in sheer numbers, many people are moving forward in terms of improving their living standards, which means the old way of our linear economy in making, using and disposing of products is no longer tenable. The expected growth in use of energy, steel, grain products and water will be high for the coming decades and is probably underestimated. The question is whether this is feasible.
With this growth in population and resource use, the pressure on the environment will increase even further. At current rates of urbanisation and population growth, global waste generation is estimated to rise to 2.2 billion tons per year by 2025, which translates into 1.42 kg of waste per person per day.
So, a different way of thinking is needed: moving from linear to circular; taking the life cycle analysis of products into account in the design. Embedding circular principles into operations will reduce resource consumption, improve resource efficiency and reduce the overall cost of waste management, which is good for the bottom line.
The importance of this topic is also reflected in the United Nations Sustainable Development Goals (SDGs), which are discussed later. SDG 12 covers responsible consumption and production, and its sub-clause 12.5 specifically targets the substantial reduction of waste generation through prevention, reduction, recycling and reuse.
We specifically see single-use plastics as an issue that is fast rising in importance. This is witnessed by the growing amount of shareholder proposals that focus on this issue, such as the shareholder proposal at McDonalds in 2018 to phase out plastic straws. This risk is acknowledged by a growing number of investors, many of whom (including Robeco) have joined the Plastic Solutions Investor Alliance collaborative engagement group.
A number of companies in the food industry are already taking action on plastic reduction. However, plastic waste is not just a risk for companies: innovation, and thinking about replacing plastic, can also bring opportunities. Packaging companies focussing on the development of high-quality paper straws are an example of this.
The plastic waste problem, including the ocean littering that creates a plastic soup is growing, leading to increasing consumer awareness and regulatory pressure. This also contributes to the expected rapid growth in the reduction of single-use plastic in the engagement efforts of investors. This engagement can focus on companies that use single-use plastic packaging, with the aim of stimulating the transition to recyclable, reusable and/or compostable packaging. Key sectors with whom to discuss this topic are the food and beverage sector and the packaging industry.
3. The SDGs: A common language in investor dialogue
The Sustainable Development Goals have made quite some impact since their launch by the United Nations at the end –of 2015. They were agreed upon by many stakeholders around the world, including companies, governments, academics and NGOs. Since the launch of the goals, many asset owners and asset managers have assessed their existing investment portfolios and engagement strategies against them and have started to use them in engagement conversations.
The Sustainable Development Goals have quickly become a generally recognised framework, but although they give a common framework of targets, there is no common framework yet on how to measure the impact that companies can make towards achieving them. Many investors are collaborating on this impact measurement question. In 2019, steps towards harmonisation of the means of measuring the SDG impact can be expected. Robeco and other investors around the globe are contributing to this.
There is a growing number of investors that includes the SDGs in their engagement dialogues with invested companies and it is very clear that the amount of investors taking this into account will continue to rise rapidly in 2019 and beyond.
