Collaborative shareholder engagement occurs when a group of institutional investors come together to engage in dialogue with companies on environmental, social and governance (ESG) issues.
By speaking to companies with a unified voice, investors can more effectively communicate their concerns to corporate management. The result is typically a more informed and constructive dialogue. Investors can benefit substantially from engaging collaboratively, but this approach can also present a series of challenges.
Benefits of collaborative engagement
Building knowledge and skills
Working as a group and drawing on the perspectives and expertise of a range of organisations can help investors to develop:
- a clear shared understanding of the issue or issues
- an authoritative business case for action
- a clear view of the desired corporate response
This collective expertise can be particularly helpful when engaging with a company on a highly complex issue or with a company that operates in a challenging environment, as investors sometimes find it more difficult to access information in these situations. Geographic and cultural diversity within a group can also enable investors to share local knowledge and contacts, and to take a more nuanced approach to engagement that is sensitive to the economic, regulatory and cultural context of different markets. Investors without substantial resources or experience on a topic can also benefit by working with and learning from others in a group with more expertise.
For institutional investors, collaboration can be a more efficient means of engagement. It can:
- avoid duplication of effort among investors, while enabling them to channel their concerns in a systematic and consistent manner.
- allow multiple parties to share the costs of research as well as the development and dissemination of principles and guidelines.
- share tasks and responsibilities according to shareholdings, expertise and location, potentially increasing the overall impact of engagement.
- offer smaller and resource-constrained investors the ability to lend their names and shares to the collaboration process.
Enhanced power and legitimacy
Research has shown that through collaborative action institutional investors can increase the weight of their demands on ESG issues in the eyes of corporate management. A group that includes different types of organisations (asset owners, investment managers and service providers with varying investment strategies, shareholdings and roles in the investment chain) will be more likely to formulate robust engagement strategies and better influence change. Due to the collective reputation, size and weight of the alliance members, an invitation to engage can be difficult for a company to ignore. Collaborating can be particularly helpful in gaining access to management with companies that have not been responsive to requests to engage by individual investors.
Challenges of collaborative engagement
Collaborative engagement tends to be a more complex process than individual engagement, and thus generally requires one party to take responsibility for coordination. In-kind costs can include time spent coordinating the group’s activities, helping the group to build consensus and a common position, and making sure that each member is well informed throughout the engagement process.
These costs can be borne by the investors leading the alliance, or by a third party (such as the PRI Clearinghouse team) which acts as facilitator of the collaborative initiative. The need for coordination among a group can also make collaborative engagement a lengthier, slower process, which may lead some investors to opt to work independently.
While working with a diverse group can bring together differing perspectives and expertise and help to build a robust engagement strategy, doing so may also mean that investors within the group have different objectives. Some may want to push a company to make more stretching changes (for example, adopting specific targets in relation to an ESG issue), while others may be content with a company making more minor changes (for example, agreeing to consider setting objectives in relation to the issue). If a compromise cannot be reached, the group may only be able to agree on the less stretching goal, which may leave those with more ambitious aims dissatisfied.
Investors may encounter regulatory barriers to collaboration such as those relating to controlling bids and anti-trust. A specific example is ‘acting in concert’ legislation in some markets (e.g., the European Union and South Africa). While these rules are generally not designed to apply to investor collaboration on ESG issues, in some cases uncertainty and ambiguity in the definitions has made some investors hesitant to become involved. European and South African investors have sought and received some clarification on these issues from regulators.
Collective action issues
In the case of collaborative shareholder dialogue, a small group of investors could take action to influence the ESG practices of a group of companies. Though only a small group of investors bear the costs of the engagement, all shareholders stand to benefit from eventual reduced risks and improved corporate performance.
Similarly, while a large number of investors may sign on to a collaborative initiative, some may not substantially contribute to the project, leaving it to a smaller group of committed investors to do all the work. Institutional investors have different resource constraints, and some may have no choice but to play a limited role and contribute to the collaboration by simply lending their names or shares to the engagement. However, not all investors are discouraged by this issue, as some place more value on building a large group of supporters who can enhance the legitimacy of an initiative than on the distribution of work across a group.
Individual versus collaborative engagement
Some investors consider it more practical and effective to engage with portfolio companies on an individual basis. This can be the case when an issue has emerged requiring immediate interaction with companies, or when an investor already has a good relationship with the management of a particular company. Competitive issues may also limit the interest of investment managers in collaborating with their peers, as they may not want to share knowledge or information that they believe to be their competitive advantage. Some investors may also be interested in working only with investors they consider ‘like minded’; some asset owners may only be interested in engaging alongside other asset owners for example. Other investors, typically significant shareholders, may believe they can sufficiently influence companies through individual engagement, and thus may feel they do not need to work with others.
Nevertheless, under the right circumstances, collaborating with other institutional investors can be an effective way to pool knowledge and information as well as to share costs and risks to achieve influence and gain corporate managers’ attention. Complex market transformation is also more likely to be achieved by an alliance of investors rather than a single institution, even a very large one, acting alone.
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