Climate change and renewables, governance, and supply chains are the top 2021 priorities for institutional investors, according to a recent survey from Bank of America.
"We expected climate to be important because everything is moving in that direction, and as a bank we've been pushing climate risk as well," said Sameer Chopra, head of Asia ESG research at Bank of America. "Supply chains are going to be very important as well. Sustainability of supply chain is going to be increasingly focused end to end, [and] that was also the top of mind with investors along with climate change."
Bank of America surveyed global investors at its recent global ESG conference, and found that respondents believe that they believe certain sectors offer bigger opportunities for improvement on ESG grounds - oil and gas (49%), utilities (44%), consumer discretionary (34%) and materials (31%). There was a relative shift away from social issues, Chopra noted.
"Surprisingly, I'd say, some of the social issues were not as high a priority for investors in 2021, maybe because they've been an important one in 2020, and they're moving on what's remaining to be done," Chopra said. "That's what I'd say, and in terms of the big improvement in ESG performance, what we're seeing is that investors see the biggest scope for improvement in oil and gas and utilities sectors."
Sustainable production and sustainable supply chains are rising up the agenda for investors, representing a shift in consumer attitudes as well as companies discovering that investing in sustainability may not bear as high a cost as assumed.
"Consumer needs are evolving, and Gen Z and Millennials have different requirements," Chopra said. "Companies have been moving in advance of this with the change, and the companies that attended our panels said that they found the cost of becoming more sustainable is not exorbitant in that it doesn't add a lot to the cost of goods sold, and consumers wouldn't notice it much in the price."
However, that doesn't hold true in all markets - Chopra noted that while the costs of social and environmental sustainability initiatives don't add much comparative costs to goods and services in established markets, in other regions, like Asia,, it can be a different matter.
"Depends a lot on the region where you're selling," Chopra said. "Companies in China are finding demand for sustainability is quite high, people are willing to pay up for sustainability - sneakers, toilet paper, tissues, diapers, people are a lot more inclined. Where it's more tricky are markets like Indonesia and India - product price is quite low, so how much can you add before the consumer says no, we'll buy something else."
There is investor interest in seeking out companies in Asia that perform more strongly on ESG. Forty one percent of attendees said Asia offered the biggest opportunities for outperformance from ESG improvement, with investors saying companies and governments are expected to play influential roles in shaping ESG during 2021.
"Asia is coming off a lower base and so the frequent questions we get are, can you send me a screen of companies that are most improving in Asia and that have the best potential right now," Chopra said. "For instance, in APAC, take board structure. Most companies do not have independent boards yet, so we look to see who are adding more independents onto the board and that tends to be the first signal, because that leads everything else around ESG. It sends a tone all the way down the organisation."
This is leading investors to ask for research into board composition in Asian companies, Chopra added.
"Investors are saying, send me a list of the companies that have added the most independents, the most females on board. A company that's already three fourths independent doesn't move the needle but one that's only 30% independent or has only one female adding a second or third changes the boardroom dynamics."
Bank of America has previously noted that companies with higher ESG scores have higher stock valuations.
Climate change continues to dominate the agenda, with investors looking to companies that are making net-zero pledges. However, from a research perspective, Chopra is seeking information on how companies intend to meet those commitments in the near and medium-term.
"We're getting a lot of companies now who are pledging net zero by 2050, but as an analyst, what I want to see is what are your commitments in 2021," Chopra said. "Thirty years from now is one thing, but what are you putting in place as targets for this decade. Those are the companies we talk to investors about.
"Signing up for net zero is one bucket, but who is signing up for measurable targets in the 2020s - they're the ones that are going to have a pathway to measure and see are they getting there, and are those targets part of the company's KPI system now."
A subset of that consideration are companies that are committing to PPAs for long term supply of renewable energy, Chopra added.
"This is being led by the tech sector and financial services sector making the commitments globally," he said. "Companies are then able to go back to their energy retailer, ask for it and you often get a five to 15 year duration on renewable energy PPAs. That in turn leads to infrastructure investment, and this is really important for the investment case because we can bank it.
"It is then up to the energy retailer to go and make sure they're bankable in a format that a bank finds acceptable for finance, because that then gives the certainty around demand which lets you go out and roll that out. A large part of corporate Australia is early in its adoption of this stuff."