A new set of investment criteria is emerging as investors take into account longer-term considerations for what drives company valuation. This is one of the key insights uncovered by the 2019 Edelman Trust Barometer Special Report: Institutional Investors.
The study, in its second year, surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (U.S., Canada, UK, Germany and Japan), representing firms that collectively manage over $4.5 trillion in assets.
The report reveals new criteria for evaluating investments as well as insights on what drives institutional investor trust in companies. Of note: environmental and social considerations are now as important as governance, and the health of a company’s corporate culture is becoming a meaningful investment factor.
Here are 10 key takeaways from the study:
- Investor ESG focus is now pervasive
Eight-nine percent of respondents say their firm has changed its voting and/or engagement policy to be more attentive to ESG risks, and 63 percent report that this change has taken place in the past year.
- Environmental and social practices matter as much as governance
Around the world, respondents strongly agree that environmental and social practices are as important as governance when it comes to investment criteria.
- Companies should expect all investors to be activists
Eight-seven percent of institutional investors say their firms are more interested in taking an activist approach to investing, and 92 percent will support a reputable activist investor if they believe change is necessary at a company in which they invest or they recommend investing.
- Corporate culture is now an investment criterion
Investors now recognize the impact that healthy culture and engaged employees have on corporate performance. Sixty-five percent of investors say that maintaining a healthy company culture and enforcing a corporate code of conduct at all levels of the company have a great deal of impact on their trust.
- Businesses are expected to lead
Ninety-eight percent of investors think public companies are urgently obligated to address one or more societal issues, with cybersecurity, income inequality, and workplace diversity being top priorities. Investors are relying on corporations to address issues that are shaping business and political environments.
- The political climate is changing investment strategies
Eight-eight percent of institutional investors agree that the current political climate is changing their firm’s investment strategy, and 89 percent of investors also agree that trade risks are changing their firm’s investment strategies. In addition, 85 percent of investors agree most companies do not fully acknowledge the new risks to their business from the political climate.
- Management does not fully control the company’s narrative
While a company’s CFO is ranked as the most credible source of information, a wide spectrum of voices both internally and externally are also viewed as highly credible sources of information, including business/financial academics and experts as well as regulatory agencies.
- The reputation of a Board of Directors directly impacts investor trust
Ninety-four percent of investors agree they must trust a company’s Board of Directors before making or recommending an investment. Ninety-two percent of investors say access to the Board of Directors is important when considering an investment, and 95 percent say an engaged and effective Board is important.
- Digital communications are now essential to the investor decision process
Ninety-eight percent of investors use social platforms, such as LinkedIn and Twitter, to inform investment decisions on a weekly basis. Eight-six percent of investors say they consult a company or an executive’s social media channels when evaluating a current or prospective investment.
- Having a long-term outlook is critical to trust
Ninety-six percent of investors agree providing long-term guidance on financial performance impacts trust.
Lex Suvanto is global managing director, Financial Communications & Capital Markets.