Blog #5 from our campaign "The Future of the Economy": Institutional investors are playing an increasingly important role in driving mass adoption of ESG.
What's driving this mass adoption of ESG-focused proposals? In a word: pressure. Institutional investors are feeling pressure from all sides to take ESG issues into account.
Kasey Wang, a law clerk at the Southern District of New York Bankruptcy Court and a Harvard Law School graduate, claims that institutional investors are responsible for a large portion of the growing support for ESG concerns. In a research paper published in the University of California-Davis Business Law Journal, Wang wrote that investors have been increasingly concerned about the environmental and social impacts of companies in which they invest. These concerns have led to a push for companies to adopt ESG policies and reporting standards. Wang notes that while many companies have been resistant to change in the past, the pressure from institutional investors has begun to change that.
The drastic change.
In the past, these proposals rarely garnered enough support to pass, but that has changed in recent years. From 2016 to 2021, 41 ESG shareholder proposals passed with majority votes. Only four ESG shareholder proposals from Fortune 250 firms passed with strong majorities in 2006 to 2015, according to Wang. This is a significant milestone for the integration of ESG considerations into mainstream investing. There are a number of reasons why institutional investors are increasingly supportive of ESG shareholder proposals. For one, they recognize that these issues can have a material impact on a company's financial performance. In addition, there is a growing awareness that addressing ESG issues can help to mitigate risk and build long-term shareholder value. As more institutional investors throw their weight behind ESG proposals, we are likely to see a continued increase in their adoption. This would be a positive development for the environment, society and the long-term sustainability of businesses. Wang argues that this shift is due to a growing awareness of the risks associated with environmental degradation and social injustice. Institutional investors are increasingly interested in proposals that address these risks.
The study shows that more and more investors demand ESG-compliant practices, companies will have no choice but to respond. Institutional investors hold a great deal of power when it comes to influencing corporate behavior and, as such, are key players in the move towards a more sustainable future.
“As awareness, concern, and energy about an issue spread among people, institutional investors that catered to the narrowest audiences began to actively support ESG issues, such as by raising ESG shareholder proposals and voting against directors who did not take ESG seriously,” Wang wrote. “The market has shifted to embrace ESG investing.”