The role of sustainability in institutional investors’ decision-making and what proxy advisors do

In an increasingly sustainability- focused business world, institutional investors - and their proxy advisors - are redefining their strategies and priorities. This was underlined by Sergio González Galán, Garrigues partner, and Juan Prieto, CEO at Corporance Asesores de Voto, at an enlightening session dealing with the implications of ESG standards and the growing requirement for transparency and commitment at listed companies.

Sustainability at the epicenter of the debate

The seminar started with a look back at how environmental, social and governance (ESG) topics have come to the forefront at companies. Sergio González Galán examined changes in the successive Codes of Good Governance and in the Capital Companies Law. This regulatory framework has now been strengthened with the CSRD, expected to be transposed by the end of 2024, requiring large companies to report on sustainability in greater detail and under more uniform standards.

Juan Prieto explained how Corporance, the first Spanish proxy advisor, came into being, and, in relation to the Dialog's subject matter, noted that “proxy advisors have had to broaden their analyses to include sustainability criteria, because they have become a key factor for institutional investors.”

The complexity of embedding sustainability in strategy

The two speakers agreed that besides being a priority sustainability has also become a challenge. Companies must embed these factors in their strategies, something that requires time and commitment. For investors, it is key to assess those issues in their investment decision-making and monitoring processes at their invested companies, for which they draw on the support of proxy advisors.

The focal points notably included compensation plans tied to ESG, and changes in the matters put to vote at shareholders’ meetings, where beyond the non-financial information statements and the forthcoming sustainability reports, a few companies have already submitted specific sustainability elements such as climate plans.

Other topics that are emerging in the dialog between investors and issuers, added Juan Prieto, are the board's independence and membership, human, social and shareholders’ rights, virtual shareholders’ meetings, sustainable architecture and planning and artificial intelligence.

The challenge of managing ESG information

Another centerpiece of the debate was organization of the large amounts of data handled by proxy advisors. “The standardization in sustainability reports arising from the CSRD will simplify that task,” noted Prieto.

“In any event, a certain rationalization of the rules may be expected so that the profuse information being required from companies does not impact their competitiveness”, González concluded.

A very topical subject

By the end of the session the message was clear: sustainability is now a key factor, for determining companies’ strategies as well as for decision-making by institutional investors.

It is still in its early stages, however, when compared, for example, with corporate governance, so across all players (investors, issuers, regulators and advisors) we must follow its progress closely.