A six-point set of guidelines to help engagement between institutional investors and corporates has been unveiled by the Governance Institute of Australia professional body following a consultation period.
A key recommendation is that institutions should take note of environmental, social and governance (ESG) issues.
The 24-page guide – the draft version of which was reported in Responsible Investor in February – has been published by the institute, whose membership includes more than 7,000 chartered secretaries, governance advisers and risk managers, and corporate governance industry veteran Sandy Easterbrook.
The guide, which is called Improving engagement between ASX-listed companies and their institutional investors, is the latest attempt to clarify how investors talk to the companies in which they invest – a “stewardship code” in all but name, though the guidance hardly uses the term.
The draft guidelines were put together with the help of representatives of major investors such as BlackRock, Colonial First State Global Asset Management, CGI Glass Lewis, ISS, First State Super, Local Government Superannuation Scheme, UniSuper and Regnan. Easterbrook, who founded Australia’s first governance and proxy advisory firm, Corporate Governance International (now part of US proxy firm Glass
Lewis), is now an independent advisor.
Principle 5 of the guidance states that it is “good practice” for institutional investors and companies to incorporate ESG issues in engagement.“Companies and institutional investors, and the collective engagement services used by them,” it adds, “are encouraged to broaden the scope of engagement beyond remuneration and board composition to cover relevant long-term strategic issues, including investment risk, many of which may be ESG-related.”
It highlights the significance of ESG risks such as bribery and corruption and labour and human rights practices in supply chains – as well as climate risk exposure – as examples of where board oversight would be of interest to institutional investors in an engagement.
“As long-term investors in economies and markets, institutional investors’ consideration of investment decisions with an integrated approach to sustainability is intended to enhance returns while minimising risk,” the guidance states.
“As such, they are considering the consequences and implications of the themes that will drive global economies over the next five, 10 and 15 years, such as potential resource scarcity, technology, aging population and population growth more generally.
“Importantly, institutional investors do not look on ESG matters in terms of promoting ethical or other investment values but as a matter of risk management to guard against longer-term damage to their investment’s value.”
It recommends that institutional investors publicly disclose who makes voting decisions, what factors they consider and their communication channels for engagement, and companies clarify who is responsible to talk to investors about what matters, including ESG issues. Link