Impact of ESG investing in Corporations

It could be argued that the recent passing of a shareholder proposal at U.S. retail company Kroger is a sign of the times. The proposal – brought forward by sustainable investment firm Arjuna Capital - asked for reporting on pay gaps across gender and race.

The “win” is consistent with an increasing interest in responsible investing, an investment approach whereby an investor incorporates environmental, social, and governance (ESG) factors into their investment decision-making. The growth of responsible investment is, in effect, a natural extension of heightened investor awareness, in which concerns over issues like climate change, labour rights and equity impact investment decisions across asset classes.

Driving Change in Gender and Racial Pay Equity

With 51 percent investor support, the success of Kroger’s shareholder proposal is no doubt a significant statement considering most proposals of that nature barely make it to 50 percent (similar shareholder proposals at Apple and Amazon were voted down). It also comes at a time when a growing number of companies, including Home Depot and Target, have made commitments to report on pay equity.

With equality a hot-button issue and a 2021 Statistics Canada report stating that women workers earn, on average, 11 per cent less per hour than men, these asks are not exactly surprising. In fact, proposals related to gender and racial pay gaps were among the top shareholder asks in 2023, shares Danna Broadworth, Client Strategy Manager with BMO Global Asset Management (BMO GAM)’s Responsible Investment team.

By supporting the Kroger proposal, investors are essentially “asking for better disclosure about the company’s strategy for advancing opportunities for women and racial/ethnic minorities” says Broadworth. Their action helps them benefit from a motivated, committed and adequately paid workforce and also allows them to mitigate risks related to increasing public scrutiny on gender and racial/ethnic pay equity issues.

What are the ESG factors influencing investment decisions?

But will this Kroger vote encourage Canadian companies to be more conscious of their pay disparities? Will it have a greater impact? And can it influence others to embrace ESG factors in their investment choices? “The proposal having passed could have an effect on disclosure in the future” shares Broadworth. “That could, in turn, push regulators to mandate this type of disclosure or it could push companies to voluntarily do so even if not mandated.”

Transparency is key, shares Gustavo Bernal Torres, Vice President of ESG Integration on BMO GAM’s Responsible Investment team, adding that salary transparency laws can already be found in some U.S. states, such as California and New York, while the UK, Denmark, France, and Germany require gender pay gap disclosures.

As of today, there haven’t been any gender pay gap proposals filed by shareholders in Canada. But Kroger’s story could encourage many to take that step, says Broadworth, noting there is a precedent here: proposals requesting racial equity audits – popular in the U.S. for the past few years – have been recently filed by shareholders at Canadian companies.

In related news, Canadian Tire recently announced it had improved its gender diversity such that their board now has more than 30 percent women. Though many Canadian companies have done the same, BMO GAM played a role in encouraging this major retailer to take this important step, says Broadworth, adding that her team works with the 30% Club Canada, a group of investors who collectively engage with companies to increase their proportion of women on boards to at least 30 percent.

Future of ESG Investing: Impact of Social Consciousness and Amazon's Sustainability Initiatives

With social consciousness increasingly shaping investment decisions, can we assume that these steps will be more common in the future? Broadworth seems to think so. Statistics demonstrate that investors have become more interested in ESG-related issues, particularly climate change she says.  

A recent announcement by Amazon would be of interest to those green-focused investors. The company said it intends to use 100 percent clean energy by 2025. With that goal in mind, Amazon has become the world’s largest corporate buyer of renewable electricity through power purchase agreements, which are funding the development of solar and wind farms across the globe.

In its annual sustainability report, moreover, Amazon reported that its carbon emissions fell for the first time. Despite the need for improvements in labour standards with regards to its workforce and Scope 3 emissions of its suppliers, in an environment laden with greenwashing and savvy marketing, these achievements are worthy of recognition, says Bernal Torres. In fact, many renewable projects in the pipeline today can give credit to Amazon (in addition to some other companies).

Rising Interest in ESG: Impact of Social Issues and Investor Priorities

Of course, interest in ESG was not born in a vacuum. Which brings us back to Kroger. “Attention to social issues, including a focus on DEI (Diversity, Equity, and Inclusion) increased after the George Floyd tragedy in 2020,” Broadworth explains. “Covid also unearthed a focus on the health and safety of employees, how they’re treated.” Within that context, it’s easy to understand why there have been more shareholder proposals like the one at Kroger of late.

Bernal Torres agrees. “ESG has become more political and emotional in public debates,” he says. But among investors, it’s now less about company ratings and more about climate risk, employee safety, and other social-related risks. “It’s about dissecting the big bucket of ESG to its truest material factors,” Bernal Torres adds.

How can you invest with BMO Investorline ESG Tool

For the DIY investor looking to align their investments with their values, BMO’s InvestorLine ESG tool can help. The tool evaluates the performance of individual stocks and ETFs using ESG ratings that are seamlessly integrated right into the platform. Simply type in the name of an equity or ETF to retrieve information on its positive or negative ESG attributes. The BMO InvestorLine ESG tool helps you stay informed on key issues and controversies related to your investments. There’s no better way of ensuring that your portfolio is the right fit for you.