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The Other E in ESG Accelerates: Engagement by Shareholders

Liqian Ma

In the midst of heightened awareness of systemic risks in climate change and social inequality, many investors concerned about long-term portfolio resilience have used their voice to seek change that benefits all investors and the broader system. We expect investors will adopt active engagement practices to a greater extent in 2022, assuming significant policy changes around climate and social issues do not materialize.

Engagement will continue to be a critical lever for investors to align portfolios with net-zero targets and seek real world change. Whereas divesting (screening) or proactive investing in positive solutions (impact investing) may lead to immediate outcomes for the portfolio, engagement may be a more nebulous and frustrating activity that may not yield immediate results because each individual investor or institution has limited influence. Management teams may resist change, climate-related shareholder resolutions may fail, and proposed actions may be watered down in reality. Indeed, climate resolutions have historically received underwhelming support from some of the largest asset managers. Nonetheless, for investors that put in the hard work to refine their direct engagement strategies or back managers that pursue effective engagement strategies, we expect long-term dividends.

A growing number of fund managers across asset classes are employing engagement as part of their ESG strategies; this includes a meaningful percentage of both marketable and private managers.

As of October 15, 2021

Source: Cambridge Associates LLC.
Note: n = 840 represents marketable fund manager responses and the n=698 represents private investment fund managers.

The key for 2022 and beyond will be heightened transparency and accountability. Standards like the 2020 UK Stewardship Code and industry initiatives such as Say on Climate are recent examples of efforts to raise the bar. Moreover, engagement on climate change will increasingly focus on requiring portfolio companies to adopt science-based targets in line with the Paris Agreement. Investors need to be cautious about greenwashing as managers may claim to engage with management teams but show little evidence. Engagement strategies can vary widely, but the most effective managers unlock investment returns as well as drive real world positive impact. That’s a winning combination that is worth our collective attention and engagement.

Liqian Ma, Global Head of Sustainable and Impact Investing Research