Getting the most out of ESG engagement

What ESG engagement is, and its role

Both scholars and practitioners agree that engagement between investors and companies has a positive impact on performance. Promoting board diversity, reshaping corporate policy and developing an ESG strategy are just some of the ways that shareholders might engage with their portfolio. As focus on ESG intensifies, and society increasingly demands understanding of business impact beyond financial success, momentum is growing.

For the purpose of this blog, we’re defining engagement as a long-term active dialogue between investors and companies, specifically on environmental, social and governance factors. This conversation offers investors the opportunity to discuss sustainability risks and opportunities with companies, in turn providing companies with insight into investors’ expectations of corporate behaviour. This way, investors encourage companies to adopt more sustainable practices. Companies also benefit from deeper investor trust. Transparency and accountability are necessary; individuals and society at large are now more likely to publicly scrutinise companies that do not follow ESG standards. Additional benefits of a well-evidenced ESG proposition include minimised regulatory and legal intervention, and increased productivity, as employees are motivated by a sense of purpose and the positive social impact of their work.

As summarised by The Investment Association, “Companies that function well are better placed to perform well – to the benefit of the company’s bottom line; its stakeholders, including its employees; and its shareholders”.

The shape engagement takes

A number of factors will contribute to what effective engagement looks like for your company, including operating environment and available resources. But we’ve pulled together some food for thought…

Investor engagement is most effective when it is personalised and specific. The more an investor understands about which ESG issues are most material to that company’s business, and how the company is currently performing against sector best practice, the more valuable the recommendations, and this dialogue overall.

Quality over quantity. Fund managers should strive to improve their ESG engagement reporting, enabling a deeper dive into these dialogues to give a detailed story about the engagement and the outcomes reached. 

Voting and AGMs. An important strategy commonly used for shareholder engagement is voting. Voting enables investors to voice their concerns with a company unwilling to cooperate on ESG issues. As the EU Shareholder Rights Directive II itself states, “greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors”. 

Shareholder engagement at annual general meetings across the globe reached record levels last year, with a 70% increase in the average number of attendees compared to 2020, according to data from software provider Lumi. As well as the increased flexibility that remote AGMs offer, it has also been suggested that increased attendance at these meetings has been down to investors taking a growing interest in how they expect companies to behave – especially with regard to social issues. According to public relations company Citigate Dewe Rogerson, 21% of organisations said they had witnessed a rise in engagement with ‘activist investors’ over the past year.

It’s reported by Ceres that this year’s proxy season saw a record number of climate-related shareholder resolutions filed. As a result companies have committed to take action, highlighting that shareholder engagement can be the catalyst for real change in terms of reaching ESG goals.

Shareholder participation has the power to influence the direction and important decisions of a company, and enforce accountability on the part of management.

Better results

Ongoing dialogue and voting are key to successful engagements, but data collection and tracking progress can be difficult. 

SI Engage provides the solution to quickly and easily planning, tracking and reporting on activity across your portfolio companies. Get in touch to find out how our system can simplify your engagement process.

Image credit to Vecteezy.com.

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