Sara Mahaffy on taking a longer-term view on key ESG themes

The world of environmental, social and governance (ESG) was once seen as niche, but is now something every investor and company is focused on. Every industry is being decarbonized. The energy transition is filtering into the cracks between every sector. Customers, employees, investors, shareholders and governments are engaging with companies to reassess their role and responsibilities in a rapidly changing world.

Following years of strong gains, ESG investors are driving support for environmental and social (E&S) policies to new heights. In 2021, proxy season voting trends for E&S shareholder proposals hit record levels. In 2022, the number of proposals set another new record, with political lobbying, climate governance and workforce diversity, equity, and inclusion (DEI) once again dominating the proposals.

What ESG investors want

Today’s investors are growing more vocal in their demands that companies address tomorrow’s ESG risks and opportunities, and are using their votes to accelerate progress.

In recent years, we have seen declining support for management’s board nominees during proxy season, and this trend continued in 2022. Additionally, we’ve found evidence that companies with lower average support levels for director nominees have also lagged on ESG topics like board diversity and climate governance. Shareholder proposals related to racial equity audits and sustainable packaging/plastic waste also received very high support levels compared to other categories.

Stakeholder demands related to topics like climate risk, diversity, equity and inclusion, will grow in urgency. But there are other powerful ESG megatrends that could add a significant boost to top-line growth for many companies, particularly those in the industrials sector.

Based on voting results, proposals related to racial equity audits and sustainable packaging/plastic waste not only received more support than in 2021, but also lead all other categories so far this year. Proposals related to political activities, climate governance and workforce D&I are also receiving higher levels of support than other categories in 2022, tracking at over 30% support.

This year’s proxy season reflects an increasing conviction among companies that integrating ESG into strategy, risk management, human capital initiatives and governance – and communicating ESG performance – is a business imperative.

Industrials momentum

As ESG assets continue to rise, several trends in sustainability will bring strong future momentum to industrial companies. Firstly, many of these firms have reprioritized sustainable strategies, particularly those focused on Indoor Air Quality (IAQ), advanced water and wastewater treatment, and energy transition.

Firstly, the industrials sector is the largest overweight position in globally focused, actively managed sustainable equity funds.

Secondly, industrial companies are unique in helping customers achieve their ESG goals by providing them with sustainable products and solutions, as opposed to other sectors that seek to achieve their own sustainability targets internally.

Momentum will continue to improve in this sector as more companies build out their strategies, implement new ESG targets and improve ESG disclosures and transparency for the future.

Understanding what this new sustainable and inclusive future will look like makes it easier to identify the companies that will thrive. Our RBC Imagine™ research program does exactly that. Taking a longer-term view on key ESG themes, from the transition to net zero to the state of diversity, equality and inclusion, it brings the future more clearly into focus, offering critical insights into the change drivers impacting companies, industries and the future of markets.