What big investors will be watching in 2018

Hands holding plant above dry soil

Board composition and companies’ environmental, social and governance (ESG) disclosures are among the key areas institutional investors will be closely scrutinising in 2018, according to a new survey by Morrow Sodali.

The consulting group’s 2018 Institutional Investor Survey found that large investors plan to sharpen their focus on directors’ skills, qualifications, experience and their individual contribution to the effectiveness of the board this year.

They will prioritise directors’ skills ahead of gender or ethnic diversity this year. Indeed, 71 per cent of the 49 global institutions polled in the survey  which together manage US$31 trillion in assets  listed skills as the most important diversity criteria.

The respondents also said they’d be looking for more detailed disclosure from companies on their ESG risks and opportunities this year.

Proving that investors increasingly recognise ESG and sustainability as material to long-term financial outcomes, 49 per cent confirmed that ESG and sustainability indicators were fully integrated into their investment decision processes across all asset classes. A further 44 per cent said they were in the process of doing this and only seven per cent had zero or minimal ESG integration.

'This portrays a strong message from investment managers on the direction in terms of assessment of ESG risks and opportunities within their investment portfolios. In our 2017 survey, 72 per cent of respondents suggested the disclosure of material ESG information was very important to their investment decisions,' the survey’s report notes.

According to the survey’s findings, investor collaboration around broader annual shareholder meeting topics is also set to grow exponentially.

Nearly two-thirds of respondents believed that collective engagement and collaboration with other shareholders related to AGMs was a powerful tool to help influence change. In addition, 61 per cent said they would be increasingly likely to support a credible activist story.

'The rise of investment stewardship strategies is redefining how institutional investors think about company performance and investment decisions,' observes Morrow Sodali.

'In this regard, many institutional investors confirm that they are more likely to support activists who put forward a credible story focused on long-term strategy. Institutional investors are assigning more resources to assess companies’ risks and opportunities and are collaborating more to better understand the merits of activist proposals.'

Respondents to the survey also displayed growing concerns around how companies articulated their business strategy and goals, and around how they explained the business rationale for board decisions and how this aligns with strategy and performance.

The survey, conducted between November and December 2017, found that executive pay was still one of the main areas where boards and shareholders are likely to disagree.

Institutional investors are expected to up the ante when examining pay policies in 2018, with 88 per cent of respondents warning that unjustified pay will come under intense scrutiny.

Morrow Sodali expects institutions to demand enhanced disclosure of pay metrics and seek a closer alignment between pay and performance. 'Further pressure will come to bear on companies with excessive pay practices, particularly with the introduction of the CEO pay ratio,' it says.

It adds that the survey’s results indicate that institutional investors are looking beyond compliance and one-size-fits-all voting policies. Instead, they are seeking specific information from individual companies that will help them understand the fundamentals of the business and its strategic goals, the value contributed by the board of directors and the links between board policies and decisions, management’s effectiveness and the company’s long-term economic performance.

'This is good news for companies willing to make these disclosures, as it opens the path to closer relations with investors based on business fundamentals rather than compliance with external standards,' says Morrow Sodali.

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