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Factors influencing whether engagement is effective or not vary. These include characteristics of the investee company as well as external factors, such as the policy and regulatory framework in which the company operates in (see Boxes 2 and 3).

For asset managers, factors may include their economic stake, reputation and people, research capabilities and expertise, as well as their experience interacting with management and boards and leveraging investor rights.

However, generally the decisive factor is the topic of engagement and the associated ask to the company. The clearer the (business) case for the ask is, the more receptive the company may be to change, increasing the likelihood of success for the engagement.

This is a challenging task, particularly where risks or opportunities are difficult to quantify, materialize over long time horizons or are subject to, or dependent on, changes in the policy and regulatory framework in which the companies operate.

This is why company-level engagement is only one lever with regard to systemic risks such as climate change: it should be complemented by systems-level stewardship, including advocacy that can contribute to the development of this framework.

For example, incentives or mechanisms that require companies to internalize externalities can strengthen the case for investment related to decarbonization (Read more).

Making the case for change within a given but developing framework is a key part of engagement. And it is the reason why much engagement on sustainability issues is focused on enhanced disclosures and targets, often the first step towards improvement in a system that is subject to change.

The case for change is particularly important for governance and sustainability topics.

For example, adding relevant experience and skills to the board of a company can lead to improved governance and enhanced decision-making, which in turn may improve performance and/or help in the management of material risks. Similarly, implementation of no-regret carbon abatement levers (reducing both carbon and costs) is a straightforward ask of companies, as it involves a solution that makes sense both economically and for the environment. And, while they are often significant challenges, replacing potentially harmful chemicals with safer alternatives can not only lead to positive real-world outcomes, but also create commercial opportunities – as demand for sustainable products is growing – and reduce regulatory and reputational risks due to increasingly stringent regulations and public awareness.

An ask that is supported by a clear value-add rationale for the business, its stakeholders and wider society, and has the potential to unlock or protect value in the short, medium or longer term, is most likely to succeed. If investors can identify such win-win cases, companies will be more willing to consider and subsequently implement the change. However, in line with their fiduciary duty, asset managers should also be ready to escalate an engagement if the company is unresponsive or not moving with adequate urgency, provided the (business) case for change has been made.

To make the case for change and contribute to the thinking and decision-making process of investee companies, asset managers need to utilize the combined means of fundamental and sustainability insights and experience.

Asset managers are well-placed to share insights and ideas, or concerns, on certain topics with investee companies, based on their research and analysis, both qualitative and quantitative, and cumulative knowledge about companies and industries as well as the important trends and macroeconomic factors affecting markets and economies.

In addition to proprietary research on themes, such as the impact of climate change, bringing together fundamental and sustainability research and analysis, providing perspectives on benchmarking of investee companies against their peers, and sharing observed best practice in a sector, or experiences regarding capital market communication can all potentially help executives and board members in their thinking and decision making.

Investors could provide helpful insights and perspectives connected to the investment case relating to a wide range of topics including corporate strategy, capital allocation, enhancements of operational performance, as well as the management of material sustainability issues and governance. Such insights and perspectives can help make the business case for change.

For example, the allocation of capital is critical in the transition of energy companies.

The industry’s journey to net zero will require massive investments, and as investors, we have a direct stake in the process and deep experience and expertise to offer.

The insights and ideas, or concerns that investment managers communicate in engagement might resonate with board members and employees of the investee companies and initiate or accelerate their thinking and decision making.

Even if the proposals aren’t new, this type of interaction can contribute to outcomes by empowering these insiders to take action and drive change, supported by a key stakeholder. In effect, as a ‘critical friend’ bringing a perspective from outside the company, an asset manager’s active ownership can help to help make the case for, and, accelerate internal efforts to change companies.

This can happen both formally and informally. For example, we have been invited by a company to present the shareholder perspective on sustainability to its board. This gave its board members the opportunity to hear our views directly, rather than via investor relations or the chair.

Drawing on long-term relationships, investment managers can make connections to management and boards of investee companies across sectors and value chains. This can include introductions to their own networks, solution providers, professional advisors that have successfully supported other investee companies and potential providers of capital or sources of finance. And they can help bring together investee companies with other investors, investor associations and relevant collaborative engagement initiatives thus informing and accelerating thought- and decision-making processes.

For example, asset managers can convene companies from across the value chain in carbon-intensive, hard-to-abate sectors, such as shipping, to discuss decarbonization challenges and solutions which require an alignment of supply and demand. (Read more.)

Asset managers can also support a company’s strategy as they seek to create and protect value – in private and/or in public. In doing so, they can help counter pressures or demands on management from investors pursuing an agenda that does not appear to be in the best interests of a company and its investors.

Working with companies that develop sustainability best practice and then helping to share this with other companies in their industry can be a powerful catalyst for change within a sector. Leveraging their available resources, investors can help companies to share best practice via joint publications, or case studies shared in relevant networks, showcasing positive outcomes achieved through engagement.

This has multiple benefits. It can help to position the company as a leader, potentially enhancing its reputation. More importantly though, it can encourage other companies and executives, triggering change across sectors with a ripple effect.

While most contributions involve working with management and boards and supporting investee companies, sometimes it is necessary to constructively challenge management and boards and hold them to account. While public engagement has its place, pressure can often be applied in private.

Challenges should be objective, carefully structured and based on a solid (business) case. Investment managers should define, communicate and track their engagement objectives, and pursue outcomes that are based on rigorous research and benchmarking. There should be clear time frames for addressing the issues, and

There should be clear time frames for addressing the issues, and insufficient progress or failure to achieve engagement goals within the anticipated timeframe should trigger systematic escalation.

In some cases, this can mean turning up the ‘voice’ or moving from ‘voice’ to ‘exit’, to use Albert Hirschman’s lexicography.¹

Active ownership needs to evolve if it is to deliver investment-relevant and real-world outcomes that help to move the needle on some of the world’s biggest challenges, such as climate change. To do this effectively, we not only need to find our voice as asset managers, but tune and pitch the way we use it appropriately.

Well-resourced and structured engagement from asset managers working in partnership with companies where possible – but standing ready to constructively challenge and hold management and boards to accountable when necessary – is key to creating and protecting investment value while also contributing to addressing environmental and societal challenges. For us, it is the way we invest to contribute to sustainable returns for our clients.

¹ Hirschman, A. O. (1970): Exit, Voice, and Loyalty - Responses to decline in firms, organizations, and states. Cambridge, Massachusetts: Harvard University Press, 1970
* Albert Hirschman's Exit, Voice, and Loyalty framework is a model that describes the different ways individuals or stakeholders respond to dissatisfaction or challenges within an organization or system. It provides a theoretical framework to understand the dynamics of feedback and reactions in the face of declining or unsatisfactory conditions.