Data science and ESG investing How can votes on executive pay impact share prices?

Our data science team found that companies that lost a vote on executive pay at their annual meetings were at high risk of underperforming share prices.

14 Jul 2020

Data science and ESG investing

 

Non-financial data is important in ESG investing. Investors need a more innovative approach at looking at information sources for insights on how companies are managing their environmental, social and governance policies.

Two UBS teams are currently working in this area – UBS Asset Management’s QED team and UBS Investment Bank’s Evidence Lab. We highlight case studies in which the teams are working with such non-financial data to generate ESG insights.

Data science and ESG investing

How can votes on executive pay impact share prices?

The QED team recently carried out an analysis on the back of a Morgan Stanley report (Say-on-Pay 2020, Mark Savino et al) that suggested that a negative vote on C-suite compensation leads to a relative one-year underperformance of 15% on average. This signal has been stable over the last five years.

QED has tested this thesis independently on compensation-related vote data from FactSet.

The dataset includes 1,700 observations from 2005 and onwards, with 95% of observations in the US. We were not able to replicate Morgan Stanley’s stable signal and degree of underperformance even if the results for 2018 and 2019 are promising.

However, large losses are more frequently observed for companies with a failed say-on-pay vote. Our analysis suggests that losses beyond -25% are twice as likely after a failed vote compared to S&P 500 constituents in general.

In an interview with Financial Times, Bryan Cross, head of QED said that these signals can guide investment decisions of our portfolio managers.

Reported in Financial Times

If you have the majority of shareholders voting against [executive pay] it shows a misalignment in terms of incentives.

It is probably already a sign of poor performance.

Chris Greenwald, Head of Sustainable Investment Research

One-year total return post failed vote on executive pay

One-year total return post failed vote on executive pay.
Non-financial data is important in ESG investing. Investors need a more innovative approach at looking at information sources for insights on how companies are managing their environmental, social and governance policies.

Investing in an ESG world

It no longer matters what you think of ESG. Like it, or not, trading is happening around the ESG discussion, so investors need to understand the effect that ESG is having on capital flows and investment returns.

Going with the flow

2019 was a year in which ESG investing really accelerated. According to Morningstar, flows into ESG funds quadrupled in 2019 compared to 2018, a trend which continued strongly into the first quarter of 2020. While the rest of the market saw outflows ESG funds continued to attract assets.

Sustainable funds raised USD 45.6 billion in the first quarter of 2020 compared to outflows of USD 384.7 billion for the overall fund universe*.

We believe ESG trends are inexorable and that investors are quickly adapting to what is a rapidly-evolving landscape.

Investing in an ESG World intends to provide a practitioner’s guide by examining four key topics:

  1. The accelerating and persistent flow of capital into ESG funds 
  2. Regulation as a driver of ESG flows, disclosures (particularly environmental), and opportunities to generate alpha
  3. The role of data, both current and prospective, in ESG analysis 
  4. The 17 UN SDGs and their potential to accelerate ESG flows

More insights