Corporate engagement strategies in impact investment

Corporate engagement strategies in impact investment

Corporate engagement and shareholder action strategies have long been a tool used by shareholders to influence the management of firms, including nudging them in the direction of more sustainable and responsible management.

Despite most S&P 500 companies publishing corporate ESG reports (from 20 percent in the 2000s to 90 percent in 2020), investors are seeking more transparency and more accountability with respect to the environmental and social footprints of companies and their impact on long-term shareholder value. This includes measuring and reporting environmental (i.e. carbon emissions, water consumption, waste generation, etc.), social (i.e. employee, product, customer related, etc.), and governance (i.e. political lobbying, anticorruption board diversity, etc.) data.

Starting from March 2021, the Sustainable Finance Disclosure Regulation (SDFR), introduced by the European Commission, imposes mandatory ESG disclosures on all EU financial market participants and advisers, including foreigners that market products to EU investors, not only those with an ESG focus. Shareholder proposals are requests from investors to public-company executives that are voted on at a company’s annual meeting or, more commonly, in proxy statements.

Shareholder proposals can force executives to take a public position on hot-button topics such as climate change and racial inequality. Typical resolutions might ask companies to publicly disclose their political-campaign spending, to increase the diversity of their workforces, or to reduce their greenhouse-gas emissions.

Companies and their lobbyists often complain that the proposals are distracting, time-consuming and costly. In 2020, IFC estimate that $6.4 trillion in assets, excluding Europe but including Australia and New Zealand, were managed under active corporate engagement and shareholder action strategies. This number represents a 35 percent increase from 2018 and reflects a growing trend toward a more active shareholder engagement process. Particularly strong growth in assets managed under corporate engagement and shareholder strategies can be observed in Canada, where they grew by 79 percent between 2018 and 2020, and in New Zealand, where they grew by 63 percent in the same time period.

While countries such as Japan, Australia, and the United States have exhibited more modest growth in these assets (by 30 percent, 20 percent, and 12 percent between 2018 and 2020, respectively), global growth has been robust over the past few years. While shareholder engagement on ESG issues has been shown to decrease companies’ downside risks, the extent to which shareholder action strategies generate measurable positive environmental and/or social impact is unclear. These days interest in sustainable investing has reached new heights, especially among individual investors that look for sustainable and ethical opportunities.

Morgan Stanley Investor 2019 survey indicates that 85% of the general population and 95% of Millennials now express interest in sustainable investing. At the same time such popularity has generated financial ‘greenwashing’ effect, whereby products are mis-sold as being more sustainable than they truly are. While the use of this term developed in response to its appearance in the consumer goods sector, it also applies when referring to financial products, where investors can be misled by the branding and specifically the naming of products.

Recently, some shareholder-coalition proposals and actions have resulted in meaningful advances to address climate change, including the commitment by HSBC Bank to phase out the financing of coal-fired power and thermal coal mining. ClimateAction 100+, a coalition of over 500 investors including the Church of England pension board, APG, and Robeco, got Royal Dutch Shell to commit to reducing its carbon emissions, to setting carbon reduction targets, and to linking these to executive pay.

Engagement from an investor coalition of more than 90 firms representing $11.4 trillion of combined assets under management resulted in six leading fast food chains, including McDonalds, Domino’s Pizza, and Wendy’s Co., to commit to science-based targets to reduce emissions.

Overall, investors employ a variety of strategies to achieve impact in private and public markets. Privately managed measured impact assets include the disclosed assets by private signatories to the Operating Principles for Impact Management and other private impact funds with a measurement system in place. To conclude, engagement – direct communication between investors and companies – on ESG matters is on the rise in the world. A number of factors seem to be driving this change.

First, companies seem more interested in understanding their shareholders’ views. Second, investors recognize connection between sound ESG management and corporate resilience. And third, there is today much greater public scrutiny of companies and investors and the role they play in the economy and society more generally.

Nowadays it seems that russia’s war against Ukraine has become another ESG issue for major investment funds and wealth management companies. In May 2022, the European Securities and Markets Authority (ESMA) issued the Public Statement to remind fund managers of their obligations to investors amid russia’s war against Ukraine.

ESMA expects fund managers of investment funds with exposures to russian, Belarusian and Ukrainian assets facing liquidity issues to assess whether a fair value of these assets can still be determined and adapt the valuation without undue delay. The Asian Infrastructure Investment Bank (AIIB) has decided that all activities relating to russia and Belarus are on hold and under review. Whereas, Quilter (leading UK-focused full-service wealth manager with 900,000 customers) made the decision to write down our very limited exposure to russian securities to a price that is effectively zero and established a process for either divesting this exposure or engaging with third party managers.

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