But let’s start at the beginning.
What is investor engagement?
Investor engagement (also called shareholder engagement) is the active role an investor takes through direct discussions and promoting dialogue with the companies in which investments are made.
The term usually refers to anchor investors (those shareholders who hold a large or the largest share of a company) or institutional investors (companies or organizations that invest money on behalf of others) and less to private investors or minor shareholders.
The goal of investor engagement is to achieve more transparency, environmental protection, social responsibility and sensible corporate governance.
The goal of investor engagement is to achieve more transparency, environmental protection, social responsibility and sensible corporate governance.
Why action is more powerful than exclusion
The active role of the shareholder is the basis for a credible, sustainable investment policy. The contribution to climate change made in this way is far more impactful than what can be achieved by excluding companies or sectors that are acting in non-transparent or harmful ways.
However, exercising shareholder rights as part of portfolio management requires additional resources. The associated time expenditure and the required specialist knowledge mean additional costs and represent a hurdle in the implementation.
A targeted selection must be made in order to invest in companies that do make mere assertions, but actually follow ecological business models. What’s needed is the possibility of an exchange with the top management in order to be able to achieve the desired goal.
While it is difficult to measure the effect of investor engagement, impactful environmental efforts are difficult to even imagine without the active involvement of investors.
How can concrete results be achieved with investor engagement?
A pragmatic solution is to take part in initiatives such as the Climate Action 100+. The initiative, founded in 2017 with over 600 investors and assets of around 55 trillion US dollars, is not only a great investment power but also creates a shared focus on the stocks that can have the greatest impact.
From transparence to transformation
The initiative pursues two lines of action: transparency and lowering emissions. As a first step towards dialogue and transformation, companies are encouraged to disclose their CO2 emissions. The latest TCFD report shows that in 2015, only 5600 companies fully disclosed their CO2 emissions in a CDP survey, while in 2020, 9600 companies did so. CDP is a Non-Governmental Organization (NGO) working to generate awareness for climate protection by publishing companies’ climate data.
Only twenty companies worldwide are responsible for a third of all greenhouse gas emissions. This means that significant results can be achieved with targeted engagement from shareholders.
Lowering emission to strengthen climate neutrality
Once emissions have been disclosed, companies will be asked to commit to reducing their emissions in order to achieve the goals set out in the Paris Climate Agreement. So far, only a few companies have made such a commitment – but then, only twenty companies worldwide are responsible for a third of all greenhouse gas emissions. This means that significant results can be achieved with targeted engagement from shareholders.
Investor engagement pays off
Engagement means much more than putting pressure on specific companies. The direct dialogue between shareholders and executives supports the organization in changing certain corporate practices, positioning itself in a smarter way than its competitors and avoiding damage to its reputation, thus preventing financial losses. In addition, companies that communicate their CO2 emissions transparently and strive to become climate-neutral benefit from easier access to cheap capital. While the stock market prices of sustainable companies underperformed in the first decade of the 21st century, the opposite is the case today.
Why investor engagement alone is not enough to become climate-neutral
Investor engagement is undoubtedly a better alternative than excluding certain sectors that are essential to the proper functioning of our economy. However, its effectiveness also has limits: Only listed companies are affected. Large parts of the private sector or governments cannot be influenced by it. In addition, most investor engagement is about cutting emissions, but that alone is not enough to stop global warming. Financing the substitution of fossil fuels with renewable energy sources is necessary to achieve that. Therefore, the goals of the Paris Climate Agreement can only be achieved if investments are made in innovative, sustainable, and climate-neutral companies that do not release greenhouse gases and thus have a positive effect on the environment.
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