We are preparing the Edelman Trust Barometer 2020 for release in Davos in January. But this week our financial team released the Edelman Trust Barometer Special Report: Institutional Investors, a study of 600 institutional investors in six markets around the world probing the importance of ESG issues (environment, social, governance). The findings are stunning, especially that 84 percent of respondents believe that maximizing shareholder returns can no longer be the primary goal of the corporation, that business leaders must commit to balancing the needs of shareholders with those of employees, customers, suppliers and local communities. Bye-bye Milton Friedman, hello Klaus Schwab and the world of stakeholder capitalism!
Here are the key findings of the study:
- Building Trust is Key to Multi-Stakeholder Commitment—75 percent of respondents said that companies need to have high trust levels to attract best and brightest employees, 74 percent said it was critical to win new customers and 72 percent said it would increase valuation multiples.
- ESG Practices Build Trust—59 percent said maintaining a healthy corporate culture increases trust for investors. 53 percent said that addressing societal issues raises trust.
- Investment Depends on ESG—Three of five respondents said that they have increased their investment allocation to companies that excel in ESG factors. 56 percent of investment are hiring more ESG staff internally.
- ESG Practices Lead to Better Performance—54 percent agreed that ESG initiatives lead to favorable impact on growth, followed by risk management (54 percent), reputation (51 percent) and return on investment (47 percent).
- Board Involvement is Expected – 99 percent of investors expect the board of directors to oversee at least one ESG topic. 57 percent said that they vote for board candidates who will increase attention to ESG issues.
- Board Composition Matters—55 percent said that board diversity has a significant impact on trust. Diversity characteristics that investors look for, include business expertise (59 percent), strategy philosophy (53 percent) and experience outside of the industry sector (52 percent).
- Link Compensation to ESG Progress—More than half of the investors surveyed say that linking executive compensation to ESG target performance improves trust in the company.
- Key ESG Priorities for Investors—The most important are: data privacy, cybersecurity, employee health and safety, eco-efficiency, diversity.
- Without Trust, Beware of Multi-Stakeholder Activism – 71 percent said that companies will make themselves responsible for employee or consumer activism if they overemphasize shareholder returns, at the expense of other stakeholders. Three-quarters say that a company with employee activism are less attractive investments.
Our Lex Suvanto, global managing director of financial communications, calls this study a “wake-up call for corporate leaders. Investors are drawing a straight line between corporate investments and societal value. ESG priorities are no longer optional.”
I would only add that the Business Roundtable announcement in August of stakeholder replacing shareholder is now echoed by the investment community. The investors want companies that are looking ahead, recognizing that consumers buy from and employees work for institutions that make values and value of equal importance.
Richard Edelman is CEO.