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Active ownership: three ways to improve investor engagement

Our latest analysis of best practice includes the findings of a survey of 350 investee companies from 45 countries, a GMO crops engagement case study and our formula for successful engagement.

21/08/2023
engagement investors

Authors

Olga Cowings
Active Ownership Operations and Insights Manager

In the latest research from Schroders’ active ownership team, we consider some of the opportunities and challenges for effective investor engagement.

A survey of more than 350 investee companies from 45 countries was conducted to gather feedback on investor engagement, to help us understand strategic issues and help investees manage material risk.

From questions around ESG disclosure to the relevance and materiality of engagement topics, we have summed up the main themes from our analysis in this document: Three ways to improve investor engagement.

Follow the link for the full details. This study follows our analysis on governance and returns, published earlier this month: Active ownership: how does engagement work and does it impact returns?

What are three ways to improve investor engagement?

We firmly believe engagement is not a one-way street. By listening to the feedback from companies in our investment portfolios, we can understand motivators, barriers, and practical actions to improve our stewardship activities. In short, our formula for successful engagement is as follows:

1. Use your influence

Use influence well, providing constructive feedback to investee companies and building consensus on expectations with other investors.

2. Dig deeper

Dig deeper to understand business practices and whether third-party ESG ratings are reflective of performance and strategy.

3. Bring in the experts

Bring in experts from both sides, leveraging the in-depth understanding of international standards and good practice from sustainability experts, and advice from investment desks on capital allocation.

Investors should prioritise quality over quantity – both in investment and engagement – seeking to build trust, create transparency, and drive accountability. This is best done through direct one-to-one feedback and collectively raising major concerns in collaboration with other investors.

What are the findings of our investee survey in a nutshell?

The findings of our investee survey include that respondents felt there should be more investor consensus on international ESG standards and reporting frameworks, that it can be difficult to determine what disclosure to prioritise, and that there is a lack of understanding of international standards in markets with more nascent engagement.

As one vice president of investor relations at a pharmaceutical company put it: “I would like to see the world’s largest asset managers take a look at all these standards and ratings and create consensus on expectations for corporates”.

Lacking coordination within investor organisations was cited as the biggest barrier to effective investor engagement (27%), followed by confidentiality (21%) and irrelevant topics/lack of materiality (20%).

Additionally, when asked an open-ended question on barriers or opportunities for effective investor engagement, 29% of respondents pointed to ESG disclosure and third-party data, and many expressed concern about the automation of ESG data collection and processing.

Shortcomings of AI use by ESG ratings providers could include systems missing company updates where information is behind a paywall or not machine-readable and differing methodologies providing varying assessments of a company’s performance on material ESG issues.

Overall customers (55%) are the most influential force when it comes to encouraging business to take action on material ESG issues, followed by the investment community as a whole (39%) and political will/government policy (38%), according to our survey of investor relations professionals.

But investor engagement is on the rise. Large companies are particularly well-equipped to engage with investors, with just one in ten citing resourcing as a barrier to engagement, compared to nearly double that (18%) for smaller firms.

The ESG landscape is particularly perplexing in markets with more nascent engagement (Latin America, Middle East and Emerging Markets). Nearly a quarter of respondents from those markets cited lack of understanding of international standards as a barrier – nearly three times the rate of other markets – so extra background information is needed when engaging here.

Additionally, when asked an open-ended question on barriers or opportunities for effective investor engagement, 29% of respondents pointed to ESG disclosure and third-party data, and many expressed concern about the automation of ESG data collection and processing.

Shortcomings of AI use by ESG ratings providers could include systems missing company updates where information is behind a paywall or not machine-readable and differing methodologies providing varying assessments of a company’s performance on material ESG issues.

Overall customers (55%) are the most influential force when it comes to encouraging business to take action on material ESG issues, followed by the investment community as a whole (39%) and political will/government policy (38%), according to our survey of investor relations professionals.

But investor engagement is on the rise. Large companies are particularly well-equipped to engage with investors, with just one in ten citing resourcing as a barrier to engagement, compared to nearly double that (18%) for smaller firms.

The ESG landscape is particularly perplexing in markets with more nascent engagement (Latin America, Middle East and Emerging Markets). Nearly a quarter of respondents from those markets cited lack of understanding of international standards as a barrier – nearly three times the rate of other markets – so extra background information is needed when engaging here.

Case study: balancing sustainability risks and opportunities at a major pharma and crop science firm

The case study in this report is about a major pharmaceutical and crop science company that Schroders began engaging with in 2005, at a time when it was focused on improving crops’ capacity to withstand climatic extremes.

It was facing public interest in product safety and the potential environmental impact of Genetically Modified Organisms (GMOs).

Through engagement, Schroders wanted to understand how the company was assessing and managing risks such as biodiversity-loss and adverse affects on human health.

In 2016, the company announced an intention to acquire a leading producer of genetically modified seeds and herbicides, and Schroders met with the CEO to discuss the potential risks.

In the following years, Schroders continued engaging on corporate culture, product safety and stakeholder relations.

By 2021, the company was flagged as a potential violator of the UN Global Compact by an independent third party, and Schroders requested increased transparency on product safety and environmental impact.

The UK and European credit investment desk began engaging this company in 2021. We requested increased transparency on product safety and environmental impact, improved reporting comparing practices to peers, and meaningful engagement with stakeholders including independent ESG assessors.

Speaking with the company’s sustainability experts the following year, we were encouraged by their detailed research on the impact of different genetically modified products.

Transparency improved: they began granting access to full safety study reports submitted to and evaluated by regulatory authorities, as well as publishing educational resources on the safety of their products.

In 2022, the controversy-related flag was removed by the third party and the company's ESG rating improved. Schroders then progressed its engagement to consider a wider set of risks and opportunities, particularly its climate and social impact ambitions.

We will continue monitoring progress.

The full report can be found here.

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Authors

Olga Cowings
Active Ownership Operations and Insights Manager

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