RI Quarterly - How ESG engagement creates value: bringing the corporate perspective to the fore

    Professor Jean-Pascal Gond, Cass Business School, UK

This article summaries some of the key findings of a research project led by Jean-Pascal Gond, with support from Rieneke Slager and Niamh O’Sullivan, Nottingham University Business School; Mikael Homanen and Szilvia Mosonyi, Cass Business School. A longer presentation of the main findings will be available in a PRI report at the end of the year, entitled How can ESG engagement create value for investors and corporations?

Corporate engagement on environmental, social and governance (ESG) issues is on the rise among investors. However, the mechanisms through which value is typically created have hitherto been an underexplored area, particularly from a corporate perspective. Our study addresses these blind spots. 

Our global study, based on interviews and existing data,[1] considers the dynamics of engagement through both an investor and corporate lens (see table below). The findings also shed light on how each side perceives those engagement dynamics, including the barriers and enablers, as well as what success looks like. 

Understanding these important differences is a crucial to improve the effectiveness of dialogue.  

Mechanisms of engagement value creation for corporations and investors

 
​Value creation dynamicsCorporationsInvestors
​Exchanging information
  • ​Clarifying expectations and enhancing accountability
  • Managing impressions and rebalancing misrepresentations
  • Specifying the business context
  • ​Signalling and defining ESG expectations
  • Seeking detailed and accurate corporate information
  • Enhancing investor ESG communication & accountability
​Producing and diffusing knowledge
  • ​Anticipating and detecting new trends related to ESG
  • Gathering feedback, benchmarking and gap-spotting
  • Developing knowledge of ESG issues
  • ​Building new ESG knowledge
  • Contextualising investment decisions
  • Identifying and diffusing industry best practice 
​Deriving political benefits 
  • ​Enrolling internal experts
  • Elevating sustainability and securing resources
  • Enhancing the loyalty of long-term investors
  • ​Advancing internal collaboration and ESG integration
  • Meeting client expectations
  • Building long-term relationships

Exchanging information: Engagement creates communicative value as it improves information flow and understanding between corporations and investors.  For example, it helps corporations develop a better sense of investors’ expectations in relation to ESG issues, facilitating enhanced corporate accountability in this area. Engagement also offers unique opportunities for corporations to improve their image during a controversy or to promote aspects of their business model that may not be fully appreciated from the outside.  Meanwhile, through engagement, investors can outline their ESG-related expectations from corporations as well as seek more detailed and accurate information about ESG practices and activities. In doing so, they can enhance their own ESG-related communication and accountability to clients, regulatory authorities and/or standard-setters.

Producing and diffusing knowledge: Engagement also has a “learning value”, serving as a way to generate and share knowledge about ESG issues, future trends, as well as limitations of current practices and activities. Specialist ESG investors have helped some interviewees identify emerging ESG trends or learn how to showcase their ESG practices and activities to other investors.  By enhancing their knowledge of ESG issues in the engagement process, investors can make more informed investment decisions in relation to a specific company and/or the relevant industry.

We found that corporations purposively use engagement to obtain feedback from investors about their ESG policies and practices, test how they are received, or benchmark their sustainability position against their industry peers. 

Deriving political benefits: We also found that corporations and investors can gain political benefits by interacting with each other.  On the corporate side, ESG-related requests from investors can help them develop internal relationships between operational and functional experts, raising board-level awareness of ESG issues and securing or enhancing resources for such activities.  On the investor side, engagement is a way to more effectively show clients that investors are fully complying with their fiduciary duty to consider clients’ interests. 


INVESTOR-CORPORATE DISCONNECTS

By considering the corporate perspective, our study highlights important differences in corporate and investor perceptions of engagement dynamics, particularly regarding success.  

For corporate actors, success can be defined across the following levels: communicative (e.g. responding to a request from an investor); learning (e.g. changing an investor’s perception of the organisation); or behavioural/instrumental (e.g. positive word-of-mouth from investors about ESG practices and activities).  Similar levels are involved in investor definitions of success, albeit with distinct meanings, ranging, for example, from exercising client stewardship duties to leveraging ESG-related corporate behaviours to enhance financial performance.

Our comparative analysis also shows that investors and corporations have different views on the advantages and disadvantages of individual and collective forms of engagement.  For example, engagements with single investors are viewed positively by corporations because numerous ESG issues can be covered, the caveat being they are time-consuming.  In contrast, corporations see collective forms of engagement as cost-effective because they can meet several investors at once, which is particularly useful during the unfolding of a controversy. However, such engagements usually focus on one ESG issue and do not allow corporate actors to showcase their overall ESG practice and activities.

Finally, our analysis shows how corporations and investors view the distinct barriers and enablers to engagement.  Although some of these barriers are relational and therefore common to corporations and investors (e.g. culture and language barriers that may prevent the development of a genuine dialogue), others are specific to each type of organisation (e.g. corporate bureaucracy, insufficient shareholding from investors to attract relevant corporate actors, or lack of resources to prepare for dialogue).

Our results suggest that improving ESG engagement may involve addressing multiple factors at the level of the investment firm, corporate investee, or the relational process that connects them both.  Third-party organisations such as the PRI operating at the corporate-investor interface can play an important role in helping to enhance enablers while also diminishing the barriers to ESG engagement.


[1] The findings are based on 37 interviews with 52 executives who manage investor ESG requests, as well as existing data about how investors manage engagement.

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