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Top concerns for investors

For the past three years, RBC GAM has asked respondents to its Responsible Investment Survey to rank their top ESG- related concerns by importance. Here, we investigate some of those rated most important over the period.

2019

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Cybersecurity

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Climate change

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Anti-corruption

2020

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Anti-corruption

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Climate change

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Shareholder rights/voting

2021

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Anti-corruption

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Cybersecurity

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Climate change

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I. Anti-corruption

Corruption of varying forms can hurt society and investors in different ways. Insider trading and price fixing in financial markets have resulted in many prosecutions and fines over recent years, while institutionalized bribery in some regions can lead to material investment and governance risks.

The fight against corruption has ranked among the top concerns for respondents to the survey since 2019. One in five (21%) investors said this could “make or break investment decisions” in 2021, although this was down from 34% in 2019.35

According to the World Bank, corruption is a major challenge to efforts to eradicate poverty and improve prosperity within the next decade.36 The UN and the World Economic Forum have launched global anti-corruption initiatives in recent years to tackle this issue.

The fight against corruption has ranked among the top concerns for respondents to the survey since 2019.

Cybersecurity

II. Cybersecurity

Cybersecurity continues to place among the top ESG concerns globally. It is a multi-faceted issue, touching upon technology, investment, social, and political arenas.

In 2021, the Center for Strategic & International Studies recorded 122 incidences of reported or confirmed major cybersecurity breaches, with Russia, China, Iran, North Korea, and the US – as well as many independent groups – regularly linked.38

As RBC GAM has highlighted in its surveys, cyber-attacks can affect the interests of all stakeholders, disrupting a company’s operations, affecting how its employees work, and inflicting brand damage that can jeopardize customer loyalty and trust. It also represents an investment risk, as companies that experience cybersecurity breaches can face material financial repercussions from both legal and reputational damages.

European Central Bank president Christine Lagarde has warned that a cybersecurity breach could result in serious disruption to the financial system, potentially threatening critical financial infrastructure and global stability.39

How concerned are you about climate change?

(Ranked on a scale of 1-5, 1 being immaterial, 5 being make or break investment decision)

III. Climate change

Climate change is a systemic issue that can materially impact issuers and the economies, markets, and societies in which they operate. It is also an investment risk.

This is reflected in how investors have responded to RBC GAM’s surveys over the past five years. As an issue of concern, climate change ranked fourth in importance 2019 and had risen to third by 2021. As investors’ understanding of climate change has evolved, however, its importance appears to have shifted: 16% cited climate change as a risk that could “make or break investment decisions” in 2021, down from 36% in 2019.40

Research by investment consultancy Mercer in 2019 modelled the impact of various global warming temperature targets on different asset classes, by assessing the effects on each of the actions necessary to meet each target. The report demonstrated the severe economic impacts of scenarios in which global average temperatures rose by 3˚ or 4˚ Celsius, while scenarios involving a 2˚C rise or less were “most beneficial”.41

However, these risks are not necessarily reflected in investment strategies. RBC GAM’s 2021 survey found that 60% of respondents did not reflect climate risk in their investment policies, with a further 9% saying they were not sure. There are significant regional differences within this, with 80% of European investors addressing climate risk in their investment policies and just 20% of US investors saying the same.

 RBC GAM survey

Does your investment policy address climate risk?

Does your investment policy address climate risk? (2021 responses by region)

IV. Shareholder rights and voting

It is not surprising to see shareholder voting rights as a significant concern among survey respondents, who are themselves or whose clients are shareholders.

In Europe, the EU implemented amendments to the Shareholder Rights Directive (SRD II) in 2017. The updated law is designed to improve investor engagement in corporate governance issues such as ESG policies and aligns with the EU’s wider sustainability aims for the financial services sector.

Meanwhile, in the US, the SEC in 2020 finalized a rule that would have made it mandatory for proxy advice companies to provide their recommendations to companies well in advance of annual general meetings (AGMs). Opponents argued that this would cause unnecessary delays to information provision and hamper investors’ ability to influence the companies in which they invest.42 The rule was later abandoned after the Biden administration took office.

The US Department of Labor also attempted to limit pension funds’ ability to vote at company AGMs through a new rule introduced in late 2021, but this has now been abandoned.43 Australia came close to adopting a similar rule last year, but it was rejected by the country’s Senate.44

Other top concerns highlighted by the most recent Responsible Investment Survey include health and safety, executive remuneration, renewable energy, and supply chain risks.

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