‘Sustainability is presented as a business opportunity, but it’s not’: the challenge of ‘win-lose’ engagements
A CEO and an engagement specialist discuss the current state of shareholder stewardship
It is fair to say that shareholder engagement professionals have faced a tough time of late, not least because of the current backlash against sustainability.
But there are also deeper questions being raised about their trade – particularly when it comes to addressing systemic risks like climate change.
Global investor PGIM articulated the problem in a paper last year, when it noted that “engaging on systemic issues may require investors to seek changes that are costly for some companies individually, but beneficial for the wider economy”.
It warned that such “lose-win” scenarios are far more challenging than “win-win” ones.
For Olivier Elamine, CEO of German listed real estate firm, Alstria, this is at the heart of the pushback against ESG.
“People are trying to avoid the difficult questions,” he tells Real Economy Progress.
“Sustainability is presented as a business opportunity, which it is not.”
It’s a topic REP explored last year, in an article about how the growth in passive investment was changing how shareholders expected company management to represent their interests.
But there are some signs that engagement efforts can still be effective.
Academics at the Wharton Business School found recently that firms engaged by shareholder network Climate Action 100+ (CA100+) had reduced their carbon intensities more than peers who weren’t being targeted; and a similar study from the London School of Economics concluded that, although there was no discernible impact on decarbonisation, CA100+ companies were more likely to set climate goals.
Elsewhere, South Korean steel giant Posco has just attributed its decision to set up a human rights taskforce and due diligence guidelines to pressure from investors via the Principles for Responsible Investment.
But for Elamine, the question of fiduciary duty remains a stubborn hurdle, whether sustainability professions want to acknowledge it or not.
“I have had conversations with ESG analysts, and when I tell them that what they’re asking for costs money and doesn’t yield anything in terms of financial results, they look shocked,” he says.
Joris Laseur, who engages companies on behalf of clients for investor research firm Morningstar, has also felt this tension.
“We can advocate for a lot of things on ESG topics, but then companies’ investor relations managers might scratch their head and say, ‘you’re not a portfolio manager making investment decisions,” he explains.
There is also frustration over the quality of engagements.
In Elamine’s experience, ESG analysts cover “10 or 20 times” more firms than their financial counterparts, resulting in “an imbalance in terms of resources and ambitions”.
“You meet with people who have little knowledge about your industry,” he says.
“Sometimes you have the feeling you are speaking with – and I don’t mean any disrespect – someone at a bar, or a taxi driver, where everybody knows everything about everything.”
It’s a feeling echoed by others.
A senior investor engagement specialist at one of the world’s largest listed companies, who spoke on the condition of anonymity, said: “Sometimes you go to these meetings with investors, and it’s like they’re just there to have a fight and feel like they’ve said their piece about big corporations.”
“I’ve met with sustainability people from large European asset managers, and they’ve gone in on me about how terrible it is that we rely on minimum wage workers. But we don’t – it is published all over our website that our lowest pay is significantly higher than minimum wage.
“They just haven’t done any prep work before coming in with their demands.
“That can be frustrating.”
Laseur, who currently oversees engagement with 28 firms, tells REP there will always be “a tension between quantity and quality”, and pressure from clients to scale up the number of engagements.
No one has the “luxury to engage only a handful of companies” he says, adding: “If you are unlucky, you can occasionally feel less prepared than you’d like.”
“It’s a challenging job,” he stresses.
But Laseur believes engagement can offer new perspectives for companies who, in his experience, sometimes “need help to see a business case for green or social benefits”.