Over the past two decades, investors have played an active role in influencing corporations to address material ESG risks. However, many investors still have questions about what outcomes can be expected from various investor influence strategies — such as dialogues with company management, shareholder proposals and proxy voting, divestment and public policy engagement. Do these investor interactions have a tangible impact on corporate financial and sustainability performance?
To answer these questions, Ceres, EDF and KKS Advisors, undertook a comprehensive review of the literature and a series of in-depth interviews with investors. This report identifies best practice in investor-corporate engagement strategies and proposes a framework for understanding the drivers of successful investor engagement efforts.
Consider the following examples of institutional investors engaging companies they own on financially material risks tied to environmental, social and governance (ESG) issues:
Deforestation
Between 2011-2017, 51 shareholder proposals were filed by US investors asking for corporate policies to address financially material reputational and market risks associated with the sourcing of unsustainable palm oil and other deforestation-linked commodities. Twenty-three companies responded to these proposals by making commitments to protect their brand’s reputations by sourcing sustainable palm oil and, in some cases, these companies even made cross-commodity no-deforestation commitments. Research by CDP demonstrates the clear business case for companies with agricultural supply chains to address deforestation, and estimates that up to $906 billion in annual sales could be at risk from company exposure to deforestation.
Workplace discrimination
Since the mid-1990s, institutional investors have played a significant role in supporting equal opportunity in the workplace by engaging more than 200 major companies through shareholder proposals and dialogue on the need to expand corporate non- discrimination policies to include LGBTQ employees. These efforts have led to policy changes at more than 175 companies. A 2016 analysis by Credit Suisse found that, over the course of six years, 270 companies that provided inclusive LGBTQ work environments had outperformed global stock markets by 3 percent annually.
Water risk
The global food and agriculture sector uses 70% of the world’s freshwater and is the biggest polluter of waterways worldwide. In light of these dependencies on water, institutional investors have sought to better understand how major food companies are addressing material water risks in their agricultural supply chains. In 2015, following
the release of a food sector water management benchmarking report by Ceres, 60 institutional investors with $2.6 trillion in collective assets sent letters to the 15 lowest scoring companies identified in the report, urging improved management and disclosure of water risks. In response to the letter and subsequent investor dialogue, 13 of the companies agreed to this request, with the majority showing evidence of stronger management of agricultural water risks in their supply chain within two years.
Climate change
In December 2017, a global coalition of investors and five investor membership organizations launched the Climate Action 100+, a five-year initiative to engage more than 150 of the world’s largest and most systemically important corporate greenhouse gas emitters. Through this initiative, investors are asking companies to improve board oversight of climate change, curb emissions and strengthen climate-related financial disclosures. To date, more than 300 investors with $32 trillion in assets under management have signed on to the initiative. A report by The Economist on the impacts of climate change calculates that the value at risk to the total global stock of manageable assets could range from $4.2 trillion to $43 trillion in losses before the end of the century. Investors believe climate change requires particular attention because it is a risk that affects nearly all industries.
While these examples show that investors and their membership organizations have played an active role in shaping corporate behavior on ESG issues, there is still a lack of comprehensive information about what outcomes can be expected from various investor influence strategies such as dialogues with company management, shareholder proposals and proxy voting, divestment and public policy engagement. Do these investor interactions have a tangible impact on corporate financial and sustainability performance? Which strategies are more effective? What are the main drivers of success?
To answer these questions, Ceres and EDF, with the support of KKS Advisors, undertook a comprehensive review of the literature and a series of in-depth interviews with investors and sustainability practitioners. This report identifies the key impacts of investor influence strategies and proposes a framework for understanding the drivers of successful investor engagement efforts