Investors’ consideration of environmental, social and governance (ESG) factors in their investment processes is relatively new by historical standards but has grown rapidly in the past decade.
Increasingly, ESG considerations are a key input when analyzing financial metrics, providing a more expansive view of the risks companies face and their potential returns.
Many investment managers believe that engagement on ESG-related issues enables them to be more active, responsible owners of their assets. It’s a continuous dialogue between the investment managers and company boards and executives on a company’s most material ESG risks and opportunities.
- During engagements, stewardship specialists work with companies to uncover ESG gaps and unidentified opportunities and encourage well-defined steps to address them. Engagement strategies are specific to each company and engagers seek to drive positive change and mitigate risk through ongoing company interactions.
- Engagement teams are experts on subjects such as climate change, sustainable supply chains and corporate governance. Many engagement teams have a diversity of skills, experience, languages, connections and cultural understanding that equips them with the gravitas and credibility to access and maintain constructive relationships with company leadership.
- The information shared and intelligence gained by engagements are used by investment teams to enhance their investment decisions and, ultimately, pursue long-term outcomes aligned with investors' objectives.
Engaging To Create Value Over Time
Below are examples of four authentic engagement milestone objectives used to measure and monitor ESG momentum:
- Raise concern at the appropriate level
- Concern acknowledged by company
- Company comits to credible change
- Change is implemented
Engagement themes and objectives include but are not limited to:
- Environmental: Climate change, natural resource stewardship, pollution waste and circular economy
- Social & Ethical: Human and labor rights, human capital management, conduct, culture and ethics
- Governance: Board effectiveness, executive renumeration, shareholder protection and rights
- Strategy, Risk & Communication: Corporate reporting, risk management, business purpose and strategy
Many investors and investment managers view engagement as a way to seek positive change for companies, for those investing in the companies and for the societies in which they operate. No matter where an investor is positioned along the line from negative screening through impact investing, active engagement has a role to play in creating long-term value and mitigating risk.