13 October, 2022 / Comment
Pressure on firms to up their engagement efforts
By Emmet McNamee, head of stewardship, Principles for Responsible Investment
PRI head of stewardship explains how firms can be better stewards of capital rather than just efficient allocators

The sophistication of investor stewardship and engagement has grown significantly in recent years. However, more progress is needed. The goals of collaborative engagements have become more advanced, seeking to improve working conditions in corporate supply chains or drive policy change in Brazil and Indonesia. Stewardship teams have grown. The expectations under stewardship codes are rising.
With this growth in sophistication, the potential avenues for investor engagement have multiplied. To name but a few, this includes: bilateral company engagement; collaborative engagements; value chain engagement; policymaker engagement for regulatory reform. While not forgetting asset owner engagement with investment managers and service providers; beneficiary engagement; and engagement with other systemically important actors such as index providers and standard-setters.
With such an array of choices, investors may be hard-pressed in knowing where to begin, or wary about being stretched too thin. Two factors may help investors navigate these challenges: resourcing and prioritisation.
Put your money where your mouth is
While the attention given to engagement has grown, it is still dwarfed by the industry’s focus on capital allocation practices. Though it is widely acknowledged that you can’t divest yourself to a greener world, many investors with net-zero goals have opted to sell high-emitting assets without any meaningful attempt to change their practices beforehand. And even among investors that do advocate for the merits of engagement over divestment, in many cases this is a line not backed up by a strong engagement approach.
How to shift the balance to make the financial industry better stewards of capital, rather than just efficient allocators?
One important aspect is the resources investors allocate to stewardship activities. Currently, investors eagerly announce the high number of engagements their team has undertaken in the past year, or how their stewardship team has grown. And yet, to translate those figures into an engagements-per-analyst or an analyst-per-portfolio company ratio, a less rosy picture emerges. Any such quantitative figures cannot be definitive, but tend to indicate the underlying quality of an investor’s engagement or that the oversight leaves something to be desired.
Investors must look at the resources they dedicate to stewardship activities and those they dedicate to allocation activities, and ask themselves if this the right balance to achieve the goals they’ve set. Does this split represent the best use of their influence? These are questions asset owners should also seek answers to when selecting investment managers.
Good stewardship does not come for free; it is something investors have to be prepared to pay for. PRI will be sourcing research over the coming year on what adequate resourcing by the investment industry looks like in light of the systemic risks we face.
Prioritise for additionality
Even with a better-resourced stewardship function, the range of potential engagement opportunities open to investors will require some kind of prioritisation. Investors should not try to cover every sort of engagement, but focus on where they can add the most value.
Three key principles that should guide engagement prioritisation efforts:
Impact
Most investors already prioritise their corporate engagements according to which investees have outsized ESG impacts that should be addressed, in the interests of the long-term value of the company or their portfolio at large. But to take one step back, investors should consider the type of engagement with potential for the greatest impact. For highly diversified investors, for example, engaging policymakers or adding their weight to collaborative sector-wide engagements is more likely to generate a positive material impact on their overall portfolio than relying on purely bilateral engagements.
Influence
Where does an investor have the greatest influence? It may be at companies where they are a significant shareholding, or have both equity and debt holdings. It may be with stakeholders in their local market. It may be with an investment manager or service provider that has demonstrated an openness to learning.
Additionality
Investors tend to gravitate to high-profile engagement targets. In the collaborative engagements that PRI has run, the best-known companies have had large numbers of investors competing to lead the engagement, while more unfamiliar names are neglected. Investors should consider avenues for engagement that have been overlooked by their peers, where their intervention could lead to progress that otherwise may not happen.
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