A new report has uncovered how investors can most effectively foster shareholder engagement on environmental, societal and governance (ESG) issues to overcome differences in structural and cultural climates around the world.
The report, titled Chains of influence , was funded by the Laudes Foundation and authored by Dr Emilio Marti, Rotterdam School of Management, Dr Kevin Chuah, D'Amore-McKim School of Business, and Professor Jean-Pascal Gond, Bayes Business School. It examines how power dynamics between asset owners and asset managers ('active owners'), companies and other stakeholders vary significantly between different countries, and identifies two chains of influence – company-centric and owner-centric. These chains depict contrasting abilities of asset owners, and the asset managers working on their behalf, to apply pressure on companies to engage in ESG activities. The study outlines opportunities for active owners to influence under-engaged companies across different global contexts.
Company-centric chains are characterised by companies having low dependence on institutional investors. They therefore hold power because active owners are reluctant or unable to exert influence on them to engage on ESG issues. Examples include Brazil, China and India. Owner-centric chains, such as the United Kingdom and France, are more heavily reliant on institutional investment which allows asset owners and asset managers to exert greater pressure on managers and companies.
Each chain of influence can be structured on a five-steps engagement process:
- Structural engagement capabilities – company-centric engagements are largely decentralised, carried out by portfolio analysts with support from professional engagement specialists. Owner-centric engagements, meanwhile, are generally centralised and executed by in-house engagement specialists.
- Setting engagement goals – company-centric engagements are largely carried out to attain ESG insights that can improve portfolio returns for asset managers, leading to increased ESG disclosure. Owner-centric engagements have more focus on influencing companies, with clear distinctions between building ESG insights and pressured engagements.
- Company interactions – engagement specialists regularly join company meetings that discuss non-ESG issues in company-centric chains of influence, so they can share best practices at scale. Owner-centric chains tend to be more in-depth, focussing on relationships and influencing fewer companies in greater detail.
- Pressure on companies – escalation of pressure in company-centric chains are discouraged for fear of appearing disrespectful or 'burning bridges'. In owner-centric chains asset owners are more willing to exert pressure through votes of no confidence in company directors or going public with concerns.
- Reporting – with less pressure exerted by asset owners in company-centric chains, there is little and basic reporting on ESG activities. Asset owners in owner-centric contexts require deeper, more detailed reporting to showcase to asset owners what asset managers are doing. In some countries this is even required by law.
Bridging these chains of influence, asset owners and asset managers can prompt stronger ESG shareholder interaction with local companies by:
- Importing pressure through mandates to owner-centric asset managers
- Funding systemic change for company-centric managers
- Leveraging the expertise of asset managers in owner-centric models
- Leveraging the local expert access from asset managers in company-centric chains
- Mobilising companies to influence peers and suppliers in company-centric countries. Cross-border collaboration, clear expectations, and strong relationships are essential for maximising impact and ensuring accountability
By considering the global and national contexts, these recommendations and findings capitalise on and extend insights from prior studies of the three researchers around ESG engagement.
Professor Gond said:
"Shareholder engagement of companies on ESG issues means very different things in different countries. While asset managers in Brazil or India may describe an activity as ESG shareholder engagement, asset managers in France or the UK may describe the same activity as mere information gathering. Asset owners that pay asset managers for ESG shareholder engagement must understand these differences.
"Active owners in different chains of influence have different types of resources and have built different types of strengths. These different resources and strengths open opportunities for collaborations between active owners from different chains of influence."
Dr Marti said:
"We found stark differences between countries in terms of how much influence asset owners have on asset managers and companies. Companies' dependence on shareholders also varies greatly by country. These differences shape how ESG shareholder engagement is done and helps explain why ESG shareholder engagement takes different forms in different countries.
"Pension funds play a critical role in influencing how ESG shareholder engagement is done in a country. In some countries, pension funds are highly active in pushing ESG shareholder engagement, which has a spill-over effect on other active owners. In other countries, pension funds are more passive."
