This chapter looks at the role of political dynamics in how ESG engagement can create value for investors and companies. 

Enrolling internal experts

We found that ESG engagement nurtures multiple dimensions of relationship building. These relationships reflect the potential reinforcement of the position and status of ESG experts within their organisations. ESG engagement usually involves conference calls or face-to-face meetings at companies or in the context of roadshows. Corporate actors in charge of engagement can invite internal operational or functional experts (e.g. managers in charge of the supply-chain and/or HR executives for human rights-related issues) to such meetings.

In so doing, ESG engagement can facilitate the enrolment of multiple operational experts across the corporations, raising inter-functional awareness of ESG issues. In particular, we found that ESG engagement facilitates the development of stronger relationships, and enhanced coordination, between ESG departments, investor relations and/or the finance function within companies. Consequently, engagement can help close the “sustainability-investment gap” often found between corporate sustainability and financial experts (SustainAbility, 2016).

Elevating sustainability and securing resources 

More fundamentally, when investors with sizeable holdings ask questions about ESG issues, they give more visibility to internal ESG experts and help raise awareness of ESG issues at the board level, thus reinforcing the position of sustainability experts. Although such an effect was more obvious at companies within which the board was not yet fully convinced of the need to address ESG issues, numerous interviewees mentioned how glad they were when an ESG request from a group of investors came through the board, rather than directly through them.

According to the head of corporate responsibility at a French food processor and retailer, engagement is more “value creating” from his perspective when “it focuses on the board and then gets down to us”. Nevertheless, benefits can also be obtained even when sustainability and ESG topics are already discussed in the boardroom: “The importance of ESG and the importance of sustainability and stakeholder engagement are already well prioritised within the company, but the investor reinforcement of those issues can only help,” says a sustainability practitioner at a US-based oil and gas company.

The affirmation of the importance of corporate sustainability experts that results from engagement can also help showcase the strategic nature of ESG issues for a company, and helps to progress the integration of sustainability within its corporate strategy. Furthermore, it offers a lever to secure or consolidate resources to advance the management of ESG issues internally.

Interviewer: “Is ESG engagement useful for you internally to obtain resources?” Respondent: “Of course. For instance, the human rights department, with three full-time staff, wouldn’t be there if there was no interest from investors. I’m not saying that we wouldn’t deal with the topic, but the impact and the means would be different.”

IR, Oil & Gas, France

Enhancing the loyalty of long-term investors 

The benefits of relationship building through ESG engagement are not only intra-organisational in nature. Engagement also helps companies secure and nurture relationships with investors, especially long-term investors. Several interviewees, especially those within investor relations departments, mentioned the importance of maintaining the shareholder register of investors with significant holdings and/or a long-term investment horizon. These interviewees see ESG communication as a way to attract and secure the investment of specialist ESG investors, as well as mainstream institutional investors interested in ESG issues due to their long-term investment horizon.

Although none of our interviewees were able to quantitatively evaluate whether ESG-focused investors actually make a difference to their cost of capital, a few companies are deliberately and proactively trying to take advantage of their ESG credentials to attract these investors. This strategy is deemed particularly relevant in markets that are traditionally less sensitive to ESG issues.

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    How ESG engagement creates value for investors and companies

    April 2018