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Investor ESG Engagement: What is it and why does it matter?

By Anna Wallich  |  
June 16, 2021  |  
6 minutes read

What do we mean by engagement? 

Engagement is a relational process between investors and companies. For the purpose of this piece, we will be examining engagement from an investor perspective: considering both the individual and the institutional investor. We are currently researching the corporate perspective and intend to publish our insights in a few weeks’ time.

Investor engagement refers to the influence brought about by shareholders in the decisions that a corporation makes. As investors’ capital contributes to funding the company in which they have shares, they have a direct impact on the activities of that company. The effectiveness of investor engagement in enacting change tends to be closely linked to the scale of ownership in the target company, and the investor’s perceived market power. Consider the media reaction to Aviva Investors’ recent announcement that it will divest from companies that don’t meet its expectations on tackling climate change. Divestment is the ultimate threat from an investor; but the impact of this will naturally depend on the scale of ownership. Importantly, there is an evident difference between the market power of asset owners, such as individual shareholders and pension funds, and that of a steward of wealth, such as asset managers. When considering this it is worth bearing in mind that such stewards should be driven by the preferences of their clients in terms of ESG and engagement goals. One example of a global investment manager focusing on what matters to their clients is Schroders, who have an impressive attitude towards CSR and Sustainability.

Engagement for individual investors

Put simply, engagement matters for investors because it gives them more understanding of and influence over the organisations into which they are investing. This allows them to take part in responsible investment and ensure that their investments align with their values. For example, this would allow a climate change activist to ensure they are not unwittingly investing in an organisation with ties to fossil fuels. This also allows for intentional positive impact investing. A good example of this is Tribe, Impact Wealth Managers who create bespoke portfolios for their clients, helping them to proactively invest their wealth according to their values and the change they want to see in the world.

By expressing their desires and expectations, and by communicating these to portfolio companies, investors earn greater autonomy over how their capital is being utilised. This allows shareholders greater influence in shaping the future of the world they want to live in. It is perhaps because of this that ever more investors are exercising their rights as shareholders to influence corporate behaviour.

It has recently been recognised that, for investors- both individual and institutional- integrating Environmental, Social and Governance (ESG) factors is one of the strongest ways to ensure long-term, sustainable returns. These factors will have a major effect over time. Conversely, not integrating them is a major risk. This has led to an improved interest in and understanding of how investors engaging with companies on ESG issues can create shareholder value, in terms of both profit and purpose.

Engagement for investment management organisations

For investment management organisations, not only is ignoring ESG factors unwise but it can be seen as a violation of fiduciary duty. For both individual and institutional investors, not engaging with investee companies means running the risk of leaving themselves in the dark about companies’ ESG practices and thus exposing themselves to longer term risk. But for institutional investors, not engaging with investee companies also means opening themselves up to criticism from their clients or members. Furthermore, better ESG performers are now becoming more highly valued than their less impressive counterparts. As responsible business and investing take hold, it is becoming riskier to invest in poor ESG performers as this runs the risk of both poor performance and reputational damage. Unsurprisingly, according to the European Fund and Asset Management Association (EFAMA), engagement with companies is a primary priority for institutional investors applying ESG criteria to their portfolios.

The advantages of engagement for institutional investors

Through more efficient and effective engagement with portfolio companies, investment management organisations can encourage easier interactions, alongside keeping track of any emerging issues and encouraging their resolution. This also fosters greater transparency, which is important when liaising with the individual investors they represent. Technology is extremely valuable in this case, as it has the potential to lead to more effective and streamlined engagement; increasing efficiency and cutting down on time and cost for investors.

Effective engagement tends to be a collaborative process between asset managers and companies, as they consider how to effect positive ESG change that can be sustained over time. One example of this would be applying constructive pressure via maintaining open discussion, setting targets, tracking results and reviewing the targets and necessary conversations accordingly.

Engagement is particularly important for the following teams within Investment Management Organisations:

  • Impact / Sustainability Team
  • Fund Management Team
  • Risk Management Team
  • ESG / Stewardship / Governance Team

Challenges and how to solve them

Whilst the benefits of portfolio company engagement are clear, the logistics and processes can be complex. The ESG Investing Ecosystem can be hard to understand; plus impact and ESG investment data is not well aligned to effectively support investors in making investment decisions.

A major challenge in investor engagement is the current inefficiency of the process. This is another area where technology holds huge potential for improving the processes. Technology can simplify stewardship processes and streamline engagement teams, reducing the time and cost of internal data analysis.

In order to make this relational process effective- both to create shareholder value and improve impact and ESG focus- institutional investors need to be able to effectively capture their engagement activities and then convey them to their clients. Institutional investors need to be able to access, engage with and align all portfolio companies’ financial and impact information. 

How this nebulous phrase, “impact information”, is defined depends on what is important to any given investor. Different investors will have different priorities: CSR, ESG, SDGs, Purpose, etc. As a starting point, it is critical that investors communicate to their portfolio companies what is and isn’t important to them.

At Maanch, we turn unstructured data into structured data, working with investment organisations to seamlessly manage their engagement with portfolio companies and communicate this information to others, in a way that is clear and easy to understand. This reduces time and cost as well as improving process effectiveness and reporting. Through our holistic engagement system, we enable constructive and trackable dialogues between investors and portfolio companies in real-time. Get in touch if you are interested in learning more about how we streamline engagement and accelerate impact in the investment ecosystem.


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