Long-term investors—those who have perpetually flagged the kind of systemic and workforce issues that now face companies everywhere—are having an outsized influence during this global crisis.

Part of that is the surge in interest in ESG investing. UBS this week said it saw flows to ESG funds and pandemic bonds of more than US$71 billion in the second quarter, bringing industry ESG assets under management to US$1 trillion for the first time. Citing Morningstar data, the firm found that 56 per cent of sustainable funds outperformed their peers in the second quarter. Sustainable investors will likely keep the wind at their backs as governments push green stimulus, the Swiss bank's analysts said.   

Historically, long-term investors haven’t been the loudest voices at companies, but there are signs short-term shareholder activists at big companies are starting to get crowded out in such a volatile market. Shareholder activist campaigns at companies valued at more than US$1 billion fell 25 per cent in the first half of the year, according to Bloomberg Intelligence.

Long-term investors hold the most sway in annual meeting season, which is just wrapping up for the year. Even though much of the shareholder proposal process was set in motion before coronavirus lockdowns, the first ever virtual-only corporate annual meeting season showed long-term investors more willing than ever to speak up on ESG issues.

Investors had more success on climate change and increasingly pushed companies on human rights, diversity and pay equity. They more frequently opposed individual board member elections, were slightly more willing to oppose executive pay packages, and less tolerant of dual class shares.

In a review of the 2020 proxy season this week, Morgan Stanley analysts found environmental proposals have declined 64 per cent since 2016, as companies have been more inclined to preemptively address shareholder environmental requests rather than risk a proposal. Social proposals, however, have increased steadily over the past four years. Both kinds of proposals saw increasing support, with the average up to 26 per cent in 2020, compared with 19 per cent in 2017, the firm said.

While few shareholder proposals ever garner majority support, even that was more common this year, Morgan Stanley found. The pass rate for environmental proposals rose to 18 per cent in 2020, while no environmental proposals had passed in 2019. And the broader focus on social and inequality issues in the COVID-19 era also translated into higher votes on social proposals. Their pass rate rose to 9 per cent this year, compared with 2 per cent in 2017, and for diversity proposals in particular the pass rate was 20 per cent compared with zero in 2018. In a U.S. presidential election year, lobbying and political transparency proposals also won increasing support, seeing 36 per cent support on average in 2020, compared with 25 per cent in 2017. 

“Corporate proxy voting records are a useful indicator of the direction of travel for ESG issues, as they highlight how investors are thinking about ESG risk and value, and indicate where corporate focus might be likely to turn in the near term,” Morgan Stanley strategists led by Allison Binns, Mark Savino and Jessica Alsford wrote in the research note. 

If anything has become more obvious in the past few months, it’s that long-term issues are suddenly a matter of short-term focus, but that raises the question of whether the process for long-term ESG shareholders to engage with companies is fast enough. 

Sustainable Finance in Brief

  • Companies are buying less clean energy through power purchase agreements as the pandemic reshapes work. “It becomes difficult to scope out the magnitude of a clean-energy commitment if a company doesn’t know what their footprint will look like short- and long-term,” says BloombergNEF analyst Kyle Harrison.
  • After pushing the NFL’s Washington Redskins to rebrand, ESG investor Geeta Aiyer is focusing on banks, REITs and evictions.
  • Kentucky farming startup AppHarvest raised a new Series C funding round for the world’s biggest greenhouse from investors including Jeff Ubben and James Murdoch. 
  • Wall Street’s top ranks look nothing like the nation they serve.    

Emily Chasan writes the Good Business newsletter about climate-conscious investors and the frontiers of sustainability.