How can shareholders help the companies they invest in to continuously improve their ESG performance? This is the challenge of the engagement between firms and shareholders: exercising proper and effective oversight over company decision-making. But how does it work?
In an explanatory video published by FNEGE Médias, Irene Beccarini, assistant professor at EMLV, and a researcher at De Vinci Research Center elaborated on the avenues that investors can use to engage companies on ESG issues.
How to engage with companies as a shareholder?
Shareholder engagement is the long-term relationship that shareholders develop with the firms they invest in. The final objective is to change policies and practices that are in place at invested firms, so as to make them more sustainable and especially those policies and procedures that have an impact on the environment, on local communities, or the society at large and internally, on the governance of the firm and on the workforce. These are also known as the ESG – environmental, social, and governance – factors.
Shareholder engagement approaches
In their long-term relationship with firms, shareholders use a variety of tactics, such as writing letters, shareholder proposals, and private dialogue. The process generally starts when shareholders formally express an ESG concern and they do so in a written letter. If, after the letter, the company doesn’t take any action, then shareholders file a formal shareholder resolution in which they ask for a change and they submit it to all investors so they can vote on it at firm AGMs, annual general meetings.
After these formal proposals, firms generally accept to enter into dialogue with concerned shareholders, and eventually, over time, they might get to an agreement and implement some concrete changes. Research shows that when shareholder engagement is effective in creating changes, it has positive consequences on the shareholder value of engaged firms.
And so the central question becomes: How to make private dialogue effective?
Two are the conditions: first of all, upfronting conflict to earlier stages of the engagement process before shareholders and firm executives develop together a solution to the specific ESG issue or concern.
Second, both parties need to maintain a collaborative attitude throughout the entire engagement process by sharing relevant information, listening to the other party, providing reasons for their positions, respecting different views, and remaining open to changing their minds.
Under these conditions, changes in ESG policies and practices that are satisfactory to both, shareholders and firms, will be smoothly and effectively implemented at the benefit of all shareholders and of society at large.
Shareholder engagement is growing exponentially and this is partially due to the growth of responsible investment. Asset owners and asset managers are increasingly signing up for the United Nations-supported principles for responsible investing, also known as PRI, and they commit to being active owners, either by starting an internal engagement team or by collaborating with specialized asset managers. More than 3 000 signatures with over $100 trillion of assets under management (AUM) were signed up in 2020 and more is yet to come.