This piece of research, commissioned by the PRI, looks at how ESG engagement creates value for both companies and investors, amid growing evidence that engagement by investors with companies on environmental, social and governance (ESG) issues can create shareholder value.
- We carried out 36 interviews with representatives of large listed companies to obtain a corporate perspective on engagement. We combined this research with two earlier studies of engagement practices involving 66 institutional investors.
- Our interviews highlight three ESG engagement dynamics that create distinct types of value for companies and investors: (a) communicative dynamics – engagement enables the exchange of information between corporations and investors, creating ‘communicative value’; (b) learning dynamics – engagement helps to produce and diffuse new ESG knowledge amongst companies and investors, creating ‘learning value’; and (c) political dynamics – engagement facilitates diverse internal and external relationships for companies and investors, creating ‘political value’.
- Combined with our previous research on investor engagement activities, we present unique insights into the differences between corporate and investor perspectives on these engagement value-creating dynamics, as well as the meaning of engagement ‘success’.
- We reveal divergent corporate and investor views on the benefits and challenges of individual versus collective forms of engagement.
- We identify specific corporate and investor enablers and barriers to engagement success.
- Finally, we present recommendations for companies and investors to improve the success of engagement.
- Companies can enhance their communication with investors by closing the loop between internal ESG information systems, ESG engagement information and ESG reporting practices. This can be enabled by deploying dedicated information systems to manage investor relations.
- Learning opportunities can be extended by ‘acting rather than being acted upon’. Corporations can use engagement proactively and strategically to test ESG policies, identify more efficient ESG targets and KPIs, and build better ESG management systems.
- Political benefits can be maximised through enhanced internal coordination between corporate investor relations departments, sustainability departments, and board-level executives before meeting with external investors.
- Investors can enhance the communicative value of engagement by making their engagement objectives, expectations and desired form of success clear to companies upfront. Communicative value can also be increased through improved public transparency and disclosure – and hence social accountability – of how engagement processes are initiated, executed, managed, monitored and evaluated.
- Learning value can be advanced if investors strengthen the feedback loop between new ESG information and knowledge gained through engagement, and their main ESG integration databases and decision-making processes. Learning opportunities can be lost however, if engagement is outsourced without any standardised feedback process.
- Political benefits can be derived internally if ESG and financial analysts work more closely together on engagements. External political value can be gained through better collaboration with clients and their beneficiaries when developing or refining engagement policies, objectives and accountability mechanisms, as well as through balancing individual and collective forms of engagement to create and maintain long-term relationships with investee companies.
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How ESG engagement creates value for investors and companies