Asset managers that incorporate environmental, social and governance (ESG) considerations into their investing decisions may be better positioned to produce long-term returns for clients, according to a new report from Moody's Investors Service Inc.
The results of Exxon Mobil Corp.'s recent annual shareholder meeting indicate that leading asset managers are increasingly incorporating the risks posed by climate change into their investment processes, the credit-rating agency's report states.
Specifically, a "large majority" of shareholders at Exxon's annual meeting backed a resolution that would require the company to disclose how it would be affected by efforts to limit the rise in global temperatures, the Moody's report notes.
"The Exxon shareholder vote is a strong signal that institutional investors want more information about the climate change-related risks faced by the businesses they fund," the report states. "Better disclosure of these risks would help the asset managers protect their clients, while also supporting the long-term financial sustainability of the companies they invest in."
In addition, the vote shows that institutional investors are increasingly willing to challenge corporate management on climate change risk, the Moody's report says. The company recommended voting against the shareholder resolution, yet it garnered support from 62% of shareholders this year, up from 38% last year.
Looking ahead, Moody's says in the report that it expects improved disclosure of climate change risk from companies. Later this month, the Financial Stability Board's (FSB) Task Force on Climate-Related Financial Disclosures is expected to issue final recommendations for standardizing climate-related risk disclosures. Furthermore, Moody's sees regulators encouraging asset managers to pursue sustainable investments one way or another.
"We believe asset managers that adopt ESG criteria could be in a better position to generate long-term value for their investors," the Moody's report says. "A consideration of ESG factors alongside financial criteria can result in a more comprehensive view of a company's risks, strengths and long-term opportunities. Asset managers that adopt this approach may also be able to stand out in a very competitive market."