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FINANCE SECTOR INTERVENTIONS

Financial institutions can incentivize sustainable business practices by leveraging available capital. This is often achieved by tying environmental outcomes and sustainable practices to financial and reputational risk: pressure and direct engagement from investors to account for such risks can push companies to change their actions towards less “risky” activities.

To gain a better understanding of whether these approaches will lead to changes in practices, researchers conducted a study that explored:

Which finance strategies are most effective at motivating corporate behavior change away from unsustainable practices? What conditions are most important in determining the effectiveness of each strategy?

THE RESEARCH

Sakis Kotsantonis, Sophie Lawrence, Chloe Tartan, George Serafeim, and Bronagh Ward (KKS Advisors); Rebecca Bar, Brooke Barton, and Emma Conover (Ceres); and Namrita Kapur and Sean Wright (EDF)

The Role of Investors in Supporting Better Corporate ESG Performance: Influence strategies for sustainable and long-term value creation

Researchers undertook a comprehensive literature review and a series of in-depth interviews to explore the effectiveness and impacts of investor influence strategies, such as direct dialogue, shareholder proposals, and divestment.

Lead Authors:

KEY FINDINGS

The findings indicate that investors play an important role in driving and shaping company sustainability commitments.

 

Some key outcomes include:

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  •  Good corporate environmental performance is good business. Evidence suggests that company engagement on environment-related risks and opportunities is associated with better shareholder returns.

  

  • Investors are more powerful when they act in a coordinated fashion, yet they are unlikely to organize on their own. An investor “ask” has the best opportunity for success when reinforced by policy advocacy and science. Such coordinated pressure – such as investor-NGO collaboration – increases the effectiveness of their influence in engaging companies.

  • Each engagement strategy has value. There is no “silver bullet” – it’s about “silver buckshot.” Strategies include shareholder proposals, proxy voting, direct dialogue, policy engagement, and divestment – all of which have benefits and drawbacks on their own but can work in synergy or may be better suited to specific situations.

  • Shareholder proposals exhibit a high success rate for securing corporate commitments. This is often due to the sense of urgency created and ability to leverage the tool as an incentive to settle an agreement behind closed doors. Researchers caution the use of this tool on its own, though, because of the risk of straining investor-corporate relationships or resulting in a commitment that is purely symbolic in nature.

  • Proxy voting brings attention to an issue and leverages collective pressure to influence change. However, voting has the potential to stall action – if continued attempts to achieve a majority vote are unsuccessful, efforts may stagnate or disintegrate.

  • Direct dialogue can increase understanding between investors and companies, leading to better chances of successful change. In contrast to other approaches, however, this is a resource-intensive approach that may not result in any formal obligation to change.

  • Policy engagement is an important tool to address large-scale market failures or systemic risks, promoting legally binding standards of transparency. This type of engagement, however, requires a longer timeframe than other types of direct engagement with specific companies. Also, while the approach is often successful in achieving policy change, it cannot ensure the stringency of the policy, nor its enforcement.              

  • Divestment, or threats of divestment, represent a direct link to companies’ reputations. Using this approach can increase public awareness of an issue and, because of the link to a company’s reputation, can increase the negotiating power of shareholders. However, when used alone, investors forego their ownership rights and may not actually have a significant impact on capital.