In the evolving landscape of sustainable investment strategies, the significance of engagement has become more pronounced in recent years. Traditionally seen as supplementary to investment processes, stewardship has transformed into an indispensable tool for achieving meaningful environmental and social change. Investors are expected to not only monitor and check in with their portfolio companies, but to also actively participate in shaping their behaviour and practices. Asset owners using third-party managers are now placing much greater emphasis on the alignment between the manager’s approach to stewardship and their own beliefs, and the consistency between the manager’s stated policies, their engagement, voting and portfolio actions.
Investors, as universal owners, are expected to address systemic issues to create and maintain long-term portfolio value. Regulators have begun to introduce voluntary and, increasingly, mandatory stewardship disclosure requirements. Stewardship continues to evolve with a focus on achieving outcomes and addressing systemic issues (acknowledging the limits to individual company engagements which address idiosyncratic risks) and engaging in public policy dialogues.
Effective engagement
Still, the pathway to effective engagement is often contested. What makes an engagement successful, and how can it be achieved consistently? Collaborative action is increasingly viewed as the answer. By uniting, investors can leverage a larger ownership stake, pooled resources and expertise to strengthen their influence. This collective approach is valuable for tackling complex and intricate sustainability challenges that require deep knowledge and substantial leverage to make progress.
Even then, it matters how investors collaborate. The effectiveness of their collective work hinges on several factors:
- Clear and aligned objectives: Investors should align on the goals of their engagement and set measurable targets that reflect their shared values and objectives. Having this consensus helps them work cohesively towards common outcomes and improve the impact of their efforts.
- Multiple engagement tools: Using engagement strategies that fit specific contexts helps in responding to different corporate attitudes and responses. In certain situations, building relationships with the company representatives and developing deep knowledge about the company’s and sector’s specific challenges is the most beneficial. This is particularly useful for addressing systemic risks, where interconnected issues need nuanced, industry-wide solutions rather than compliance exercises.
“A collective approach is valuable for tackling complex and intricate sustainability challenges that require deep knowledge and substantial leverage to make progress”
When a company is unresponsive or not willing to engage, it could be time to use more assertive tactics. This can be filing shareholder resolutions or voting against management and specific directors on relevant topics. These tools can be useful for sending strong signals about the seriousness of the risk, and encourage more structural company-level or industry changes. It is important to build relationships and trust with the companies, but there may be times when using other methods are needed if progress stalls.
- Consistent and coordinated messaging: Companies often get mixed signals from different investors. By collaborating, investors can coordinate their messaging, making it easier for companies to understand and prioritise their responses, which is more likely to lead to the desired changes.
- Contextualising: Strong collaborative engagement requires a nuanced approach and should be context-based. It is important to align coalition demands with a company’s operational realities and culture. These strategies not only make the engagement more relevant and immediately actionable but also help make the messages resonate within the company. This increases the chance of them being implemented.
- Policy engagement and advocacy: Collaborating on public policy can strengthen investor influence beyond individual companies, affecting industry standards and regulatory frameworks. These efforts should be strategic and need to be well-researched and well-prepared to maximise their impact on corporate or sustainable investment practices.
Careful collaboration
In line with these strategies, recent research, including the study ‘Tailor-to-Target: Configuring Collaborative Shareholder Engagements on Climate Change’ published in Management Science, suggests that effective collaboration is part art and part science. The paper stresses the importance of carefully choosing who is in the group, stating that the success of investor collaborations depends on getting the composition right. Important factors are the group’s size, how much they have invested, their experience, their local knowledge and access to the company.
This strategic alignment, along with the ability to leverage a diverse knowledge set about the company, enables investors to communicate effectively and push for substantial changes. As an example, a group of investors joining together to speak with companies about deforestation would benefit from engaging with Chinese companies because China is the world’s largest importer of soy, which is well-known for its association with deforestation.
For this group, it would be important to include local investors who have a good understanding of the cultural norms and business practices of the region. By starting off on the right foot with
respectful and appropriate interactions, it helps to build trust to open the door for bigger changes. The local investors may also have a better idea of the relevant regulations, not only on paper but how they are applied in practice, setting the group up with a better understanding of the operating environment.
Influencing corporate behaviour goes beyond simply gathering as a group. It requires developing a tailored strategy that fits the unique circumstances of each engagement. As the investment world aims to tackle escalating and accelerating sustainability challenges, the importance of investors working together strategically is becoming more crucial. This thoughtful, tailored approach is the key to driving sustainable change effectively.
Greta Fearman is senior responsible investment officer at Cardano
