2019 Edelman Trust Barometer UK Special Report: Institutional Investors
Panellists Introductory remarks by
Lord Paul Myners Chairman, Edelman UK Chancellor of the University of Exeter
Marisa Drew CEO Impact Advisory & Finance, Credit Suisse
Dame Helena Morrissey Founder, The 30% Club, Fund manager, Author
Richard Buxton
Simon Dingemans
Head of UK Equities, Merian Global Investors
Chairman, Financial Reporting Council
Moderator - Iain Dey, Senior Director, Head of Special Projects, Edelman UK
2
A Diverse Sample Primary Investment Style Growth
36%
Value
17%
Industry-specific
12%
Activist
11%
Quantitative/Index
10%
Hedge
9%
GARP
6%
Age
Gender 53%
31.63% 22%
17%
5% Under 24 25-34
35-44
45-54
1%
55-64
65+
13%
Organizations' Assets Under Management In USD
38% 33% 15% 7% Chief Investment Officers
Portfolio Managers
25%
25%
Respondents’ Job Titles
Financial Analysts
68.37%
3%
Directors of Research
6% Investment Stewardship
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Edelman Trust Barometer Special Report: Institutional Investors S1: What is your approximate age range? S7. In your current job, approximately how much are your institution's investable assets? S8. Which of the following best describes your position or level within your company or organization? D2. What is the primary investment style for the funds you manage on behalf of your organization? D4. What is your gender?
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Why do investors need to trust you?
Why do investors need to trust you? To attract new investors to buy its stock
To effectively execute its strategic plan
To attract and retain the best and brightest employees
43%
42%
39%
34%
42%
45%
Critically important
Important
To win new customers and grow market share
Critically important
Critically important
Important
To increase its valuation multiple
Important
To operate without unnecessary involvement from regulators
37%
31%
31%
45%
52%
46%
Critically important
Important
Critically important
Important
Edelman Trust Barometer Special Report: Institutional Investors Q2b: Using the scale below, please rate how important it is that a company has a high level of trust when it comes to each of the following. – Important / Critically important Summary
Critically important
Important
5
Trust seen as a CSuite and BoardLevel Priority
15% Disagree
I must trust a company’s Board of Directors before making or recommending an investment (% Selected)
Edelman Trust Barometer Special Report: Institutional Investors Q2a: Who do you look to be the most important stewards of trust within a company?
85% Agree
6
What drives trust levels?
A healthy corporate culture is the number one factor that drives trust
90%
88%
87%
Maintaining a healthy company culture
Enforcing a corporate code of conduct at all levels of the company
Addressing societal issues (e.g., immigration, inequality, diversity)
82%
Disclosing employee diversity and inclusion statistics
Edelman Trust Barometer Special Report: Institutional Investors Q3: How much do each of the following corporate behavioural practices positively impact your trust in a company that you are/may consider investing in or recommending? For each one, please indicate the level of impact using a 9-point scale where 1 means “no positive impact on trust” and 9 means “a great deal of positive impact on trust.” - Very positive impact (Top 4 Summary)
8
All three letters of ESG matter… Environmental factors
Governance practices
Social practices
66%
71%
63%
Important
Important
Important
UK
GLOBAL
54%
Important
54%
Important
Edelman Trust Barometer Special Report: Institutional Investors Q15: Please select how important each of the following elements are when it comes to ESG investing. For each one, please indicate how important it is using a 9-point scale where 1 means “Not at all important” and 9 means “Most important”. (Top 3 Summary)
57%
Important
9
Taking ESG seriously is a proxy for taking risk seriously…
“ESG and profitability are about the same thing. They just operate on different timescales… If you get environmental, social and governance factors wrong, they are financial; they do bite you” - Euan Stirling
Global Head of Stewardship and ESG Investment at Aberdeen Standard Investments
Investors make longterm decisions to invest based primarily on a company’s growth strategy and its approach to risk… What investors see as the most important attributes for longterm valuation 58
Growth Strategy
40
Risk assessments
33
Employee commitment and engagement Technology & innovation pipeline
32
Shareholder engagement
32 31
Corporate Purpose Executive compensation
26
Board of director composition
26
ESG factors
22
Edelman Trust Barometer Special Report: Institutional Investors Q14: Beyond financial projections, what other aspects are important to determine a company’s long-term (3-5 year) valuation? Please select the 3 most important aspects that you use to determine a company’s long-term valuation.
12
But, investors also tell us that companies that take ESG seriously tend to be those that take risk seriously, and therefore perform better… ESG linked to performance
Investors believe ESG Initiatives have favourable impact on a number of key metrics:
66%
of UK investors say that they see a positive correlation between operational performance and ESG disclosure
55
Growth
51
Risk management
49
Return on investment
43
Reputation
Employee retention
Edelman Trust Barometer Special Report: Institutional Investors Q23: Do you see a positive correlation between operational performance and ESG disclosure? Q18: On which of the following do active ESG initiatives by a company have the most favourable contribution?
32
13
This is not a UK thing… Globally, most investors think that operational performance and ESG disclosure are correlated Percentage that see a direct correlation between ESG implementation and operational performance 78
85
66
34
58
Global
Canada
41
Netherlands
44
Germany
Edelman Trust Barometer Special Report: Institutional Investors
Q23: Do you see a positive correlation between operational performance and ESG disclosure?
U.K.
U.S.
Japan
14
So there is a correlation between the attributes that a good ESG policy gives you, and the attributes that make a company a good investment
Risk management
Growth
Long Term Value
What does ESG bring? … Growth and risk
Edelman Trust Barometer Special Report: Institutional Investors
15
And they are looking all the way through the value chain
74% GLOBAL
83% UK
Edelman Trust Barometer Special Report: Institutional Investors
Q28: When evaluating social and environment risks related to an investment decision, do you consider risk to the full value chain of the company?
16
Investors may say they believe in all this, but does it really impact decisions?
ESG hiring intentions Percentage of respondents who state their firm is hiring additional staff for ESG…
…and where they sit within the firm’s organization
9.00% 49%
47% 40%
34.00%
Portfolio management ESG-specific divisions
57.00%
Governance / proxy voting / Investment stewardship
Yes No I am not sure
Edelman Trust Barometer Special Report: Institutional Investors Q20: Is your firm hiring additional staff for ESG specifically? Q21: Where do ESG-specific hires sit in the firm’s organization?
18
Investors would take lower rates of return in exchange for more ESG/impact “My firm would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.” Percentage who agree Global
84%
86%
US
83%
Germany
83%
UK
Canada
90%
Japan
90%
Edelman Trust Barometer Special Report: Institutional Investors Q16: Please indicate the extent to which you disagree or agree with the following statement regarding ESG/impact and socially responsible investing. - My firm would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations (Top 2 Summary)
19
Investors are investing more in ESGexcelling companies What actions are your firm taking to be more attentive to ESG Risk?
UK
(% Selected)
57%
61%
Increased our investment allocation to companies that excel when it comes to ESG factors
55%
Global
57%
We vote our shares more often for board candidates that we believe will increase the company's attention to ESG issues
51%
53%
We vote our shares more often to support ESG-related policy initiatives
Edelman Trust Barometer Special Report: Institutional Investors Q17: You just indicated that your firm has changed its voting or engagement policies to be more attentive to ESG risks. Specifically, what is your firm doing in this regard?
20
Adopting a more active approach to screening for ESG / sustainable investments…
21
Taking a more visible, active stance on climaterelated stewardship…
22
And even starting to deploy shortselling strategies to profit from companies resistant to change on ESG and sustainability…
300
The Green Short: Funds Target Laggards in Sustainable Shif
200
100
0 2012
2013
2014
2015
2016
2017
2018
Source: Lucca De Paoli, Bloomberg, 5 November 2019
23
Diversity and ESG are not quite the same thing‌
When investors say they want Board diversity, what does that mean?
Investors see experience as the most important diversity metric in trusting a company 51
Experience outside the industry or sector
49
Business areas of expertise
47
Business strategy philosophies
Among those that selected “diversity within a company’s Board has a significant positive impact on trust”
34
Gender
33
Ethnicity
30
Age Nationality Race
19 17
Edelman Trust Barometer Special Report: Institutional Investors. Q6: You just said that diversity within a company’s Board of Directors and executive team has a significant positive impact on your trust in a company. What are the top 3 types of diversity you consider to be the most important when it comes to trust building?
25
Nonetheless, investors want corporate attitudes to change
Business (partly) to blame for splits in society
70%
of UK investors believe companies are partially responsible for current employee and consumer activism because they overemphasize shareholder returns at the expense of other stakeholders
89%
of UK investor agree with the statement that “some experts say that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities”
Edelman Trust Barometer Special Report: Institutional Investors Q29: Are companies partially responsible for current employee and consumer activism because they overemphasize shareholder returns at the expense of other stakeholders? Q30: Some experts say that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities. To what extent do you agree with this statement? Top 2 Summary
27
The customer is always right… How important are the following stakeholder groups to a company’s long term financial performance?
63%
Customers / clients
53%
Employees
44% Shareholders
40% Regulators
Edelman Trust Barometer Special Report: Institutional Investors Q31: Please rank the following 4 stakeholder groups in terms of their importance to a company achieving long-term positive financial results with 1 being most important and 4 being least important. - Important (Top 2 Summary)
28
A ‘scandal’ can have a purgatory effect for investors…
Investors now trust auditors more… Following the recent controversy in the UK accounting sector, how has investor perception of the reliability of company accounts changed? Changed Positively
18.00%
25.00%
57.00%
Changed Negatively No change
Edelman Trust Barometer Special Report: Institutional Investors Q1 UK: Has your view on the reliability of UK company accounts changed following the controversy regarding the auditing profession?
30
The market is always right…
A short position is a good reading on problems % of respondents who believe a sustained short position in a stock is an accurate predictor of future issues and challenges
8.00% 28.00%
Yes
64.00%
No Not sure
Edelman Trust Barometer Special Report: Institutional Investors Q2 UK: Do you consider a sustained short position in a stock an accurate predictor of future negative newsflow and problems?
32
Investors know they have power – and are willing to band together with activists to get their way
79%
“Most companies are not prepared to handle activist campaigns”
85%
“In general, as a firm, we are more interested in taking an activist approach to investing”
91%
“I will support a reputable activist investor if I believe change is necessary at a company I invest in or recommend investing”
94%
“I believe my firm’s actions can have a meaningful role in influencing a company’s operating performance”
Edelman Trust Barometer Special Report: Institutional Investors Q7: Please indicate the extent to which you disagree or agree with the following statements regarding shareholder activism. - Agree (Top 2 Summary)
33
If you are out of favour, how do you win back trust?
Strategy is the main thing investors seek clarity on… more than bottom line
59%
Conduct a business review and explore strategic alternatives
52%
Announce changes to a company's strategy
43%
Significant cost cuts
38% Realign executive compensation with performance
38% Replace weak performing executive management team members
29% Refresh longest tenured Board members
Edelman Trust Barometer Special Report: Institutional Investors Q12: If a company is underperforming compared to its peers and trading at a significant discount, what actions can it take to maintain your trust in its ability to improve its performance or meet expectations going forward?
35
Always, always, always hold an investor day…
38%
39%
Increase access to Board members
Introduce a long-term (3-5 year) guidance framework
49%
51%
Increase shareholder engagement outreach to communicate corporate governance initiatives
Supply additional disclosure around financial and operational performance that puts the underperformance in a context that makes sense
54%
Hold an investor day to fully explain the company's strategy and operating plan
Edelman Trust Barometer Special Report: Institutional Investors Q13: If a company is underperforming compared to its peers and trading at a significant discount, what communication tactics can it take to maintain your trust in its ability to improve its performance or meet expectations going forward?
36
On the key issue of corporate culture, you can offer assurance by giving investors a bit more access to people in the business…
72%
Of respondents agreed that “a healthy company culture has a significant positive impact on trust”
The most important metrics or methods investors state they use to evaluate corporate culture
53
Speaking with senior leadership
51
Workforce diversity percentages
47
Speaking with current employees at all levels
44
Employee engagement surveys
Best Places to Work rankings
40
Monitoring employee social media sites like Glassdoor, Indeed
39
Voluntary employee turnover rate
38
Speaking with ex-employees
37
Edelman Trust Barometer Special Report: Institutional Investors Q4: You just said that maintaining a healthy culture has a significant positive impact on your trust in a company. What metrics or methods do you use to evaluate corporate culture and the success of the company’s human capital management practices?
37
Investors do judge you on your use of social media When evaluating a current or prospective investment, I consult the executive’s social media channels
75% 77%
Edelman Trust Barometer Special Report: Institutional Investors Q32: Please indicate to what extent you agree or disagree with the following statements. – Agree (Top 2 Summary)
When evaluating a current or prospective investment, I consult the company’s social media channels
38
Multidimensional Company’s stakeholder position within the industry engagement
Total addressable market (TAM)
Healthy corporate culture
Employee Engagement
Strong code of conduct
Next Level Governance
Ability to attract best + brightest talent
Clear and compelling growth strategy
Company front and center on societal issues
NextGen Investment Criteria
Margin and profitability story
E+S
Preparedness for global social & environmental risks
E+S focused on full value chain
Cash flow outlook
Capital allocation framework
Strength of leadership team & board
Focused on emerging opportunities and risks
Board diversity & engagement
Compensation tied to ESG
39
Edelman Trust Barometer Special Report: Institutional Investors
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