A growing number of investors are undertaking corporate engagement and exercising their rights as shareholders to influence corporate behaviour. Between 2014 and 2016, the volume of assets managed with explicit commitments to engage or vote on ESG issues grew 41% (GSIA, 2016). In Europe alone, engagement (and exercising voting rights) is the third most popular responsible investment strategy. It is carried out by managers of more than €4.27 trillion assets under management, a figure that grew by 30% in the two years to 2016 (Eurosif, 2016: 22).
This growth will continue to be sustained through the support of regulatory changes such as the EU Shareholders’ Rights Directive, the progression of global corporate governance and stewardship code requirements, and mounting social pressures on companies and investors to adopt of more sustainable business practices (Çelik & Isaksson, 2013).
This shift in institutional investor practices towards ‘active’ forms of ownership indicates that institutional investors recognise that their fiduciary duty to clients and beneficiaries should involve purposeful consideration, monitoring and intervention regarding ESG factors affecting investee companies.
However, despite the increasing amount of resources devoted by institutional investors to engagement practices, the manner in which ESG engagement creates value remains understudied. Moreover, studies that focus on the role of companies in the engagement process are especially scarce. This report addresses these gaps, and acts as the first product of an on-going research project commissioned by the Principles for Responsible Investment (PRI) to develop a better knowledge of how and why ESG engagement can create value for both companies and investors