Following the Council of Institutional Investors Conference, we highlight two emerging social issues that were top of mind for active investors, Cyberthreats and Human Capital & the Future of Work, and discuss how partnering on engagement can drive long-term value.
On March 9-11th the Council of Institutional Investors (CII) held their spring conference and 35th Anniversary celebration with over 350 CII members and guests in attendance. I’ve attended a few CII conferences over the years and while the conference is historically focused on corporate governance, there’s been a noticeable increase in the quantity and quality of discussions on environmental and social issues.
This year I was intrigued to see social issues emerge as central themes at the conference, with two in particular that were a focus of discussion for driving long-term shareholder performance.
- Cyberthreats to Long-Term Performance
Many investors are grappling with understanding cyberthreats and how to evaluate the risks and engage with companies on risk mitigation. This is a focus area for investors due to the potential impact of cyberthreats on shareholder value, and the broad scope of companies potentially impacted by these risks. EY’s 2020 Global Information Security Survey found that 59% of organizations have faced a material or significant incident in the past 12 months and 48% of boards believe that cyber-attacks and data breaches will more than moderately impact their business in the next 12 months, yet cybersecurity is often an afterthought and not fully understood at the board level. This is a daunting issue impacting many businesses, so it’s important for investors focus on industries and companies facing the most material risk from cyberthreats. For example, Sustainalytics sees the healthcare sector as particularly vulnerable to ransomeware and other malware attacks. As a result, through our Cybersecurity in Healthcare engagement we are partnering with investors to engage with healthcare companies to take a proactive approach to assessing and managing cybersecurity.
A CII session moderated by Mary Beth Vitale of Pellera discussed how cyber vulnerability can affect long-term performance. The panel argued that investors should engage with companies on cybersecurity and push for it to be front and center with the board and C-suite, and treated with the same priority level as operational and supply chain risk. By approaching cybersecurity as a core strategic priority, investors can help shift the narrative from one of risk and compliance to position cybersecurity at the heart of business transformation and innovation and treat it as a business risk and opportunity, giving it the attention it deserves and helping to improve long-term performance.
- Human Capital and the Future of Work
As the workforce evolves with increasing automation and contracting, companies are rethinking how they manage human capital in this dynamic environment. In an interview between Meredith Miller of UAW Retirees Medical Benefits Trust and James Williams, CFO of the US Department of Labor, they addressed that the prevailing view of Artificial Intelligence (AI) and automation being a threat to workers should not be the only lens that investors take on this theme. For investors, there is an opportunity to change the conversation away from a focus on net savings/cost cutting and build a business case that accounts for costs and potential benefits and opportunities to human capital management, such as upskilling workers to focus on higher value-add activities. While investors can look to the proxy statement to attempt to understand whether executive compensation is aligned with sound human capital management, engagements such as Sustainalytics Future of Work are needed to look under the hood and improve company preparedness to proactively manage workforce needs and transitions for a sustainable labor market. As highlighted at the conference, this dialogue should happen at the executive and director level to shift expectations and set the tone at the top to managing human capital effectively.
Power of partnering on engagement to drive long-term value
Finally, an overarching theme of the conference that really resonated with me was the power of partnering on engagement efforts to drive long-term value through improved governance of E&S issues. Many institutional investors face resource and expertise constraints amidst growing expectations to engage on an expanding range of topics and universe of companies. By partnering on engagement, either through coalitions or outsourced engagement services, investors can pool their resources and expertise to engage more effectively and efficiently on E&S risks and opportunities to drive long-term value. I was struck by the many different examples referenced throughout the conference. These can take the form of thematic engagements (Climate Action 100+, Investors for Opioid Accountability (IOA), and Sustainalytics Thematic engagements) or can be focused on material risks or compliance with international norms.
Regardless of your engagement focus, it is clear that the link between long-term shareholder value and social issues like cybersecurity and human capital are increasingly understood by the investor community. I expect these themes will remain on the CII agenda for years to come, and that by viewing opportunities in addition to risks and pursuing collaborative engagements, we can achieve significant progress.
Inconsistent Definition of ‘Sustainable Investments’ Across EU Regulations Could Cause (Unintentional) Greenwashing
The absence of clear parameters to support the regulatory definition of sustainable investments has pushed market participants to make judgment calls leading to diverging investor approaches.
EU's Iterative Approach to Sustainable Finance Regulations Isn't Perfect, But It's a Good Start
The EU Action Plan for Sustainable Finance has kept the European investment market busy over the past year. In this blog post, we highlight the merits that we see in the EU regulatory package. While not perfect, the regulation is a good start.