Corporate executives often struggle to focus their attention on every issue at the same time, so must prioritise the claims of the most important stakeholders.
This paper explores how institutional investors can act collectively to enhance their importance in the eyes of investee company managers, in order to influence corporate behaviour on environmental, social and governance (ESG) issues. It also examines the role of enabling organisations such as the PRI, in facilitating this process through helping to overcome barriers to collective action by providing a framework for investors to work with one another. In doing so, Gond and Piani show that organisations such as the PRI can facilitate the emergence, deployment, and maintenance of collaborative actions.
Jean-Pascal Gond and Valeria Piani Enabling Institutional Investors’ Collective Action: The Role of PRI Initiative Click here to view the most recent paper online
Gond and Piani examine how institutional investors use power, legitimacy and urgency to influence corporate behaviour on ESG issues. They explore the processes whereby institutional investors reshape executives’ perception of both institutional investors and ESG issues and explain how an enabling organisation can facilitate, enhance and maintain these processes.
Power is the ability to influence or control the behaviour of individuals and organisations and defined as including:
- coercive dimensions that point towards the physical resources of force or restraint;
- utilitarian dimensions that reflect the mobilisation of material or financial resources;
- normative dimensions that correspond to the use of symbolic resources such as prestige and esteem to obtain compliance from other parties.
Legitimacy is whether actions are appropriate within current systems of norms, values, beliefs, and definitions.
Urgency is whether the claim on ESG issues is perceived as requiring immediate action.
The research took account of the barriers to individual and collective action, such as free-riding behaviors from participants, and looked at the multiple roles of enabling organisations to overcome these challenges and support the collaborative engagement process. The study looked at on three case studies of investor collaboration around ESG issues, derived from posts in the PRI Clearinghouse, a signatory-led platform that is designed to encourage information sharing and collaborative engagement between investors, investee companies and policymakers.
The case studies involved investor concerns over: human rights violations in conflict zones; allegations of abusive labour practices in the iron and steel industry supply chain; corruption and transparency. Cumulatively, the three scenarios involved 109 investors with US$18.4 trillion of assets under management (AUM) and targeted 168 companies. Interviews were conducted in the United Kingdom, the Netherlands, New Zealand and Norway, covering asset owners/ managers and mainstream and niche socially responsible investment (SRI) funds with a diverse range of AUM. The authors use archive analysis, observation, interviews and document analysis of all communications between individual investors, the collective group and the investee companies in an attempt to map and theorise the processes underlying the relationships between investors and investees, and capture the investors’ experience of collaboration.
The research found that coalitions should not try to build all three of the power, legitimacy and urgency attributes at once, and instead recommends building the legitimacy of the group, then demonstrating its power, and finally impressing a sense of urgency and its requests by:
- Share information on target companies or the ESG issue with other participants.
- Define and communicate to companies the business case.
- Refer to international conventions, codes and civil society reports.
- Benchmark companies on ESG issues and, if targeting laggards, refer to the best practices of their industry leaders.
- Include large mainstream investors in any coalition.
- Investors should assert themselves in early dialogue by stressing the total amount of assets under management or shareholding in the target company, and possibly publish company ESG benchmarks.
- However, the research recommends that exhibitions of collective power such as divestments, shareholder resolutions and proxy voting or other ultimatums should only be considered if companies fail to respond or perform as agreed. (Feedback showed that the ”threat of action was more powerful than the action itself”).
But a consistent build-up of trust over time also proves a strong tool to building influence.
Our findings also show that investors can collectively create a feeling of urgency on the investees’ side by carefully managing the time-pressure through the use of strict deadlines for demonstrating progress or change in relation to the ESG issues at hand.
The role of enabling organisations
The research also looked at the role of the PRI and found strong evidence that the involvement of an enabling organisation has a positive effect. It does this in the following ways:
- Triggering the initiative on an issue – the PRI started a collaboration project after receiving strong demand for assistance from signatory investors.
- Offering mobilising structures – the existence of the Clearinghouse platform enabled investors with concerns on a particular issue to find like-minded investors and elaborate a common position.
- Reducing the incentive for firms to let another investor carry the burden of effort on behalf of the group . the PRI fs secretariat assuming a co-ordination role can prevent a burden bias.
- Providing a structure that bears co-ordination costs – the PRI involvement reduced the coordination costs for investors involved in the collective action.
- The PRI’s collective engagement framework gives investors a context to exert their influence.
- Enhancing the processes of investors’ influence – evidence that the ability of the collective to use the symbolic PRI/United Nations name in negotiations enhanced their level of influence and made it “difficult, if not impossible” for corporations to ignore them, and that the PRI’s involvement and “constant support” was seen as crucial in keeping up pressure, urgency and persistence.
Creating opportunities for dialogue with corporations - the PRI is better able to maintain conditions for constructive dialogue with companies rather than individual investors, especially as dialogue can typically take place over a number of months or even years.
Constructive dialogue between investors and investee companies requires time, knowledge and financial resources. Collaborating with peer institutions can divide the workload, share costs, prevent duplication of effort and give more weight to investor demands by increasing their power, legitimacy and urgency. Successful collaborations approach these three attributes in a staggered way, first by asserting the credentials of the coalition and not rushing to issuing ultimatums. In forming investor collective actions, the use of an enabling organisation, such as the PRI, can greatly improve the experience of the group members, enable them to apply greater pressure on company managers and lead to more successful actions. Therefore, the PRI initiative not only acts as a set of useful principles for investors but also as a catalyst for collective action.
The implications of the research are not limited to the contexts of the PRI secretariat and its Clearinghouse platform. By uncovering the mechanisms that support collective action, the findings can enhance collective action in other areas, such as for the United Nations Global Compact (UNGC), and fights against corruption, such as in Egypt or India.
RI Quarterly vol. 6: Focus on the PRI impact
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Enabling institutional investors' collective action: the role of PRI