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Many hands can make ESG work

Joint efforts by investors on ESG issues can be more effective than traditional one-to-one approaches. But with collaborative efforts still relatively uncommon in many areas, there is now a real opportunity for more ESG investors to come together to drive corporate change.

Collective engagements are more effective in some regions

Our analysts say there are several factors that influence how effective each approach is, the most important of which are local practices and customs.

In Europe, collaborative engagement is viewed as relatively more effective because ESG is now part of mainstream investing, there are many activist organisations, and because ownership concentration can be high. One analyst who covers European stocks says: “Europe is not only tuned into ESG issues, but our team knows the senior management of European companies well and is plugged into the various industry bodies and regulatory systems. This helps us to be heard.”

North America and Japan are the only regions where collective action is not viewed as more effective, but even here it is still on a par with one-to-one interactions, meaning it pays to develop good relationships with management teams to build an understanding of which approach works best.

Our analysts who cover the US and Canada report that engagements often take the form of helping companies understand a different perspective rather than encouraging a specific action, so a personal approach can work better. One US healthcare analyst says: “ESG doesn’t come up in group meetings or collaborative settings because fewer US investors are focused on it. So as one of the largest European investors that these domestic US businesses meet, we tend to have better ESG engagement in our one-to-one calls. That is changing though as US demand for ESG products grows.”

Chart 1 - Many hands make ESG work

On the other hand, grouping together with other investors can help companies to focus on a particular issue. A US industrials analyst observes: “It can be a more powerful and consistent message to companies when a group of shareholders (or bondholders) all deliver the same message, rather than each talking about their own specific concerns. Many companies I talk to feel somewhat overwhelmed by the wide variety and volume of ESG questions they are fielding, so a collaborative approach may help them focus on the key points that matter.”

Japan, meanwhile, has a different regulatory structure for corporations than elsewhere, and companies still have a lot of crossholdings which can complicate investor discussions. Our fund managers believe Japanese corporate culture is changing fast, and shareholders are being listened to much more, especially during one-to-one engagements on governance.

However, as one fund manager puts it: “Japanese cultural norms mean that aggressive collaborative engagements can be viewed as threatening and could lead to the opposite outcome of what was intended. Domestic asset managers are also often subsidiaries of financial institutions, meaning working together may create conflicts of interest for them.”

Room to grow

Despite signs that investor collaboration can amplify the impact of engagements, only 16% of our analysts report that it is common in the sectors they cover, giving plenty of room for joint action to increase across all regions.