· 5 min read
Investor engagement priorities generally reflect a combination of bottom-up and top-down approaches to monitoring. With the former guided by unique investee circumstances, the latter is often based on specific engagement criteria or thresholds.
Encompassed in these approaches are often a focus on specific topics based on client and beneficiary interests, significant holdings exposures, credit quality/durations, ESG considerations (e.g. breaches of international norms, poor ESG risk rating scores), and value chain engagements, often through collaborative initiatives. This article highlights the most common engagement types, and what reasonable timelines look like when influencing for change.
General engagement lengths
From investor preparation and outreach to management awareness and strategy implementation, engagements are often multi year initiatives. To allow enough time to pass for companies to implement (negotiated) objectives, it can often take 2-3 years.
Here are some indicative time frames:
- Management awareness of investor concerns: 0-3 months
- Acknowledgement and willingness to discuss: 3-6 months
- Policy and strategy development: 6-12 months
- Implementation and target follow-up: 12-24 months
Engagement types:
1. Reactive, norms-based engagements
A common engagement type, with the purpose to ensure portfolio holdings operate within (read: avoid breaches of) international norms and standards related to human rights, society, labour, and environment.
This strategy involves recurring screening of portfolios, with initiated dialogue should there be heightened risk of or a confirmed breach of such principles. Under the OECD Guidelines, as outlined in the investor guidance “Responsible business conduct for institutional investors”, investors should prioritise investee companies for due diligence taking into account the severity or significance of adverse impacts. This is then understood as a function of its scale, scope and irremediable character:
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Scale refers to the gravity of the adverse impact
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Scope concerns the reach of the impact, for example the number of individuals that are or will be affected or the extent of environmental damage
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Irremediable character means any limits on the ability to restore the individuals or environment affected to a situation equivalent to their situation before the adverse impact
This kind of evaluation is often central in ESG data providers’ research.
Following stewardship efforts to mitigate, remediate and prevent future occurrences of adverse impacts, investors should assess the need for ‘extended engagement’ or escalation. It’s difficult to say anything about average engagement lengths here, as severity and urgency go hand in hand, however, in my experience, the aforementioned indicative timelines are common/relevant.
2. ESG materiality engagements
Securities are exposed to different material ESG factors over the short, medium and long-term. Even if holding periods have fallen, you might still be exposed to certain factors over time due to trading strategies. Ultimately, the interests in the financial viability and sustainability of any issuer should align over longer time horizons.
Depending on investment exposures and asset classes, stewardship practices will look differently here. Given how many investors struggle to showcase engagement progress, when starting engagements, investors should preferably set objective target dates and use milestones to monitor progress over time. Importantly, time frames should align with liability management and the interests of clients.
3. Sustainability outcomes-focused engagements
Engagement focus used to for example address the SDGs or the Principal Adverse Impacts (PAIs - indicators covering a range of ESG factors) as outlined in the SFDR in Europe. The latter disclosure regulation requires applicable financial market participants (FMPs) to identify, assess, address and report on these over time.
The precise time horizons for addressing and reducing these negative impacts over time (e.g. by using engagement) are left to the discretion of the participants, as it depends on the nature of their investments and the specific sustainability factors involved. The overall intention is to promote a long-term view of sustainability impacts. Read more on SFDR and the investment stewardship angle here.
4. Thematic / Focus topic engagements
Dedicated dialogues with one or multiple entities on the same topic. Oftentimes targeted through collaborative engagement initiatives.
Across different topics, there is often guidance available to companies and investors on generic performance expectations. Given investors’ different profiles and circumstances, they can usually determine what these expectations mean for them and how it should be implemented. This whilst acknowledging the need for enabling policy environments.
Generally, targets address the short, medium and long-term. The reference to each might be spelled out in specific guidance, but otherwise, short-term is normally considered as 1-3 years, mid-term 3-5 or extending to 10 years, and long-term above 5-10 years. As it regards Net zero for example, these time horizons are referenced in target-setting, along with the milestone years of 2030, 2040, and 2050. Lack of progress would then require escalation, which for example the Science Based Target initiative, suggests over time frames of 6, 12, 24, to 36 months.
5. AGM-related
Engagement, voting and investment decisions feed into each other. Investors vote to inform, affirm and advise. As such, engagement and voting are part of the same stewardship toolbox, where for public equity, binding votes are the most forceful lever for driving change.
AGM-related activities cover for example the provision of vote intention, votes on management/shareholder proposals, monitoring of external managers' voting, filing resolutions (where possible), and post-vote engagement.
Engagement tracking
A note on investors’ related data management practices. In Redington’s 2023 Sustainable Investment Survey covering 127 firms and 281 strategies, under 20% of strategies seem to have engagement activity tracked in a meaningful way that enables the manager to assess the success of its approach.
Considering the increasing complexity of engagement processes, it would be an understatement to say that effective workflows, data capture and reporting are necessary parts of any successful stewardship approach. As such, there are now a number of cost-effective tools like Esgaia available to investors to improve engagement recording, monitoring and coordination over time.
In conclusion
Participants in the stewardship ecosystem should continue to challenge, collaborate and innovate to build a financial system that works for, and offers choice to clients to meet their objectives.
While it might not be investors’ role to engineer specific outcomes in society (to paraphrase Larry Fink), as intermediaries, acting on behalf of others, responsible stewardship is important to protect and develop the long-term value of assets and the market as a whole.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
