Morningstar - Q1 2020 - 8

Dispatches

What's Ahead for ESG
Examining the trends
and their implications.

Phillips Curve

From Shareholders to Stakeholders

In Good Company

Policy
EU Prioritizes Sustainable Investing

LETTER FROM THE BOARD

Jon Hale

Ivory Towers

Global Briefs
21
23

Americas
Greater Europe
Asia

Interest in sustainable investing continues
to gain steam, as investors, asset managers, and
corporations recognize the risks of ignoring
environmental, social, and governance, or ESG,
issues. Investors see a need to guard against
ESG risks as they save for their long-term future;
asset managers are engaging more with
companies on ESG issues; and corporations realize
that they need to tackle ESG-related risks
to build sustainable competitive advantages
that will last decades.
I took stock of recent developments in the field.
Here are the stories I'm following.
The Growing Immediacy
of Climate Change

People everywhere are directly experiencing
extreme and uncommon weather events.
The hottest July on record occurred in 2019,1 and
last year was the second hottest year since
modern temperature data collection began
in 1880.2 These trends and events are constantly
in the headlines, set alongside a steady
stream of scientific reports pointing to the same
conclusion: that human-caused climate
change is warming the Earth, and the worst
effects can be avoided by drastically
reducing greenhouse gas emissions over the
next two decades.

I think investors will become increasingly
concerned about the impact of climate change
on their portfolios. They'll want to reduce
climate risk, and there is some academic evidence
they are already doing so. A group of Swiss
researchers found that funds Morningstar labeled
as "low carbon" experienced higher net
flows compared with otherwise similar funds.3
I also expect that more investors will want
portfolios free of fossil-fuel holdings and
that the demand to address climate-change
solutions via investments will grow.
Asset managers, meanwhile, will increase their
focus on the physical risks of climate change.
Wellington Management, for example, is
working with Woods Hole Research Center to map
the areas of the world where climate change
will make it increasingly difficult for companies
across many industries to operate.
The Shift Toward Stakeholder Capitalism

The world is shifting its thinking about the
purpose of the corporation, as illustrated by the
Business Roundtable's statement on
corporate purpose released in August. A significant
departure from the longstanding view
that the primary purpose of a corporation
is to maximize shareholder value, the Business
Roundtable statement said the purpose
of a corporation is to serve and create value for
all stakeholders.
While sustainable investment strategies vary
in their particular investment approaches,
at some level most of them are trying to identify
companies that are pursuing stakeholder
value, avoid those that aren't, and engage as
shareholders with the ones they own to
urge them in that direction. Corporations are more
likely to adopt a stakeholder-centric view if they
have a base of investor support for it.
Proxy Voting and Engagement Take Center Stage

Investors continued to support shareholder
resolutions related to ESG issues in the 2019 proxy

1 National Oceanic and Atmospheric Administration.
2 Copernicus Climate Change Service.
3 Ceccarelli, M., Ramelli, S., & Wagner, A.F. 2019. "When Investors Call for Climate Responsibility, How Do Mutual Funds
Respond?" Swiss Finance Institute Research Paper, No. 19-13, Nov. 19.

Morningstar Q1 2020

Morningstar - Q1 2020

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