BOSTON/LONDON - Investors concerned about climate change and social justice had a bumper year in 2021, successfully pushing companies and regulators to make changes amid record inflows to funds focused on environmental, social and corporate governance (ESG) issues.

Extreme weather becoming more frequent and events highlighting social justice issues, such as the death of George Floyd in Minneapolis police custody, contributed to ESG rising to the top of the agenda of investors, companies and policy makers.

A record $649 billion poured into ESG-focused funds worldwide through Nov. 30, up from the $542 billion and $285 billion that flowed into these funds in 2020 and 2019, respectively, the latest Refinitiv Lipper data shows. ESG funds now account for 10% of worldwide fund assets.

Stocks of companies rated highly for their sustainability efforts also notched gains. The MSCI World ESG Leaders' index has risen 22% so far this year, compared with the MSCI World Index's gain of 15%.

Investors flexed their muscle to challenge companies' ESG credentials, culminating in a landmark board challenge against oil major Exxon Mobil Corp. Support for social and environmental proposals at the shareholder meetings of U.S. companies rose to 32% in 2021 from 27% in 2020 and from 21% in 2017, according to the Sustainable Investments Institute.

"It was a watershed year," said Tim Smith, a director at investment management firm Boston Trust Walden.

He contrasted the votes this year with one of the earliest corporate social policy measures, in 1971, when only 1% of General Motors' shareholders backed an investor resolution for the auto maker to withdraw from South Africa over the country's racist social policies at the time.

Regulators have responded to the new pressure by making ESG disclosures a priority. The U.S. Securities and Exchange Commission (SEC) has been asking money managers about the ESG classifications they use for their funds and is expected to firm up guidance on corporate disclosures such as carbon emissions. 

The European Commission has finalized most of its "sustainable finance taxonomy" rulebook on which corporate activities can be labeled climate-friendly. Rules will apply to some sectors in the European Union starting next month.

Of the $6.1 trillion in ESG funds, 59% of the money is held in Europe, Middle East and Africa, according to Lipper, reflecting the region's earlier embrace of the investing trend.

Inflows in European ESG funds dropped in 2021, but this was more than offset by rising flows into U.S. and Asian ESG funds.

Major wins for ESG investors pushing for changes at companies this year included the replacement of three directors at Exxon Mobil, the rejection of a $230 million pay package for General Electric Co's CEO Lawrence Culp, and a successful call for Union Pacific to make public its workforce diversity statistics. 

Catherine Winner, global head of stewardship at Goldman Sachs Group Inc's asset management division, which backed the critical shareholder efforts at those three companies, said investors are no longer satisfied with companies delivering shareholder returns without doing more for the environment and society.

"It's not just about shareholders; it's about all stakeholders" she said.

 

ESG SETBACKS

To be sure, ESG investors also suffered blows in 2021. Shareholder resolutions that drew significant support but did not gain majorities included a call to reform employment arbitration procedures at Tesla Inc and a call for Amazon.com Inc to review how it addresses racial justice and equity. 

Many top corporate investors warmed up to ESG resolutions, even if they did not back them most of them time. Out of 49 climate-related resolutions this year, BlackRock Inc supported 41%, up from 10% of a similar set of resolutions in 2020, according to advocacy group Ceres. Vanguard funds increased their support to 37% from 14%.

Both major index fund companies declined to comment on the Ceres report. But they have previously said companies must have appropriate risk oversight of environmental and social issues, and that they try to be transparent about their views. 

In the United States, companies can sometimes avoid putting shareholder resolutions to a vote by asking the SEC for permission. Thomas Skulski, managing director at proxy solicitor Morrow Sodali, said the SEC strengthened the hand of ESG investors in November by narrowing the circumstances under which companies can skip votes. 

As a result, companies next year could face more challenges on operational issues, such as how they use consumer packaging or plastics, Skulski said.

(Reporting by Ross Kerber in Boston and Simon Jessop in New York Editing by Greg Roumeliotis and Lisa Shumaker) ((ross.kerber@thomsonreuters.com; (617) 856 4341; Reuters Messaging: Ross.Kerber.Reuters.com@Reuters.net))