2016 saw a dramatic surge in interest in all things environmental, social and governance (ESG)- from a wide range of stakeholders – from investment houses and pension trustees to governments and policymakers. Investor stewardship, whether this be self-imposed or government-mandated, is the rallying cry.

We do not expect interest in this topic to decline in 2017, given rapid growth in ESG-related mandates and the macroeconomic and political focus on income inequality, fair tax and climate change.

Below, we summarise a selection of the key issues which we will be focusing on in the coming year. 



We expect climate change to continue to be the key long-term environmental concern for investors. Despite the success of the COP21 international climate negotiations, tangible national policies, including marked-based mechanisms are lacking, and credible national policies will take years.

Market anomalies continue to exist: a report from the International Monetary Fund in 2015 found that fossil-fuel companies benefited from subsidies of $5.3 trillion a year (6.5% of global GDP or $10m a minute!) when factoring in the full costs to governments of burning fossil fuels.[1]

It might be said that economics trumps environment every time. With a Trump presidency and elections in climate-leaders France and Germany, we think policy progress in 2017 is set to be glacial. Therefore, in the short term, we believe pressure is more likely to come from investors mandating low-carbon investments and requiring fund manager climate disclosure, than from politicians or regulators.

In our view, the heavy emitters, i.e. the utility, extractive, construction and automotive sectors, remain most exposed to regulatory as well as physical risks, owing to their high energy costs, the nature of their product and their long-dated, physically exposed assets. However, outside of cutting energy costs, we see little incentive for change in 2017. Consequently, we expect innovation to slow in technologies and new markets that need price support in the absence of political backing.

Nevertheless, investors are wary of ‘lower-for-longer’ commodity prices and the increasing reputational risk of investing in companies which contribute visibly to climate change. With the fossil-fuel divestment movement gaining traction and increasing interest in climate issues from asset owners,[2] we expect the focus on heavy emitters to be unrelenting. This may translate into more proxy-voting campaigns like the ‘Aiming for A’ extractives campaign in 2016.[3]

Given this backdrop, measuring emissions will be an important part of identifying efficient businesses and investment risks and opportunities in 2017. We believe that companies which plan and invest in resilient portfolios today will be rewarded for their capital allocation decisions in the future.



Cyber security will remain a focus. As digitalisation and automation dominate the transformation of the global economy, cyber risk and data protection pose ever greater challenges for business.

As data growth rapidly expands at an astonishing pace, the frequency and perceived severity of cyber-attacks is increasing. However, few companies appear prepared to contain the threat, with 36% of respondents to an EY survey stating they would be unlikely to detect a sophisticated cyber-attack.[4]

We see opportunities for companies whose business models enable them to respond to and protect clients from evolving cyber risk. Take insurance for example, where cyber insurance premiums globally are forecast to rise from $2.5bn in 2016 to $20bn by 2025.[5]

The international tax system is undergoing major transformation, as we explained in a blog post at the end of last year. The exploitation of loopholes, the increasingly intangible nature of company assets and the digitalisation of the global economy have made it easier for multinational companies to reduce tax. Governments are responding and tax avoidance strategies are increasingly in the spotlight.

Bribery and corruption was a key topic in 2016, a record-breaking year in the history of the US Foreign and Corrupt Practices Act (FCPA), which saw 27 companies pay a record $2.48bn in fines to resolve cases, with four making the top ten for the biggest cases of all time.  

In 2016 the US bolstered its FCPA enforcement resources, adding ten prosecutors and three FBI squads of special FCPA agents. The Department of Justice’s Fraud Section has set up a pilot programme to encourage companies to self-report, cooperate and remediate bribery and corruption issues by offering mitigation credit in the final settlement.

We believe that enforcement actions will continue with renewed vigour in 2017. Any company which has public-sector exposure and is listed in the US or operates under US law is at risk.



Asia will be a focus as governance reform moves up the political agenda.  A number of countries have followed Japan’s lead and adopted Stewardship Codes, including Malaysia, Hong Kong and Taiwan. Meanwhile, in Korea, currently at the bottom of the Asian governance league, there is speculation around governance reform.

In China, there is still no news on the wholesale lifting of restrictions which ban foreign ownership of certain industries, and we expect variable interest entities (VIEs), complicated structures used by many companies to bypass foreign investment restrictions, and which are yet to be legally recognised, to continue.

Remuneration remains the hardy perennial as we discussed in a post at the end of last year. Limiting quantum of pay for executives appears to be on the agenda in the UK, with proposals to give shareholders a binding vote on pay packages, not just pay policy.

We believe that fears of a talent exodus are overplayed, but we may see a talent drift at specific companies with poor succession planning or a history of ‘star’ execs. We are also beginning to see innovation in executive remuneration design which should help to align interests with shareholders.

Protectionist shareholder mechanisms are on the rise. In 2016 we saw governments intervene in company affairs to the potential/actual detriment of investors. Governments argue that their intention is to protect ‘national champions’ in times of economic uncertainty, champion workers’ rights, enhance long-term shareholder rights and address problems in the delegated investment chain. We are unconvinced that this is anything other than good old protectionism.


[1] IMF, May 2015: http://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0

[2] Take for example the French energy transition law, adopted in 2015, which requires portfolio-level climate disclosure, or the increase in Freedom of Information Act requests around climate issues by UK public-sector pension-scheme members.

[3] ‘Aiming for A’ is a coalition of investors currently undertaking in-depth engagement with the ten largest UK-listed extractives and utilities companies on climate issues.

[4] EY’s Global Information Security Survey 2015 http://www.ey.com/publication/vwluassets/ey-global-information-security-survey-2015/$file/ey-global-information-security-survey-2015.pdf

[5] Allianz http://www.agcs.allianz.com/insights/expert-risk-articles/cyber-risk-2025/


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