Drivers of collaborative engagement

Investors engage with policymakers to meet their fiduciary duty, improve investment risk management and create an enabling environment for sustainable investments. Effective engagement ensures that the risks to investee companies from ESG issues, such as climate change, are minimised and mitigated. Long-term sustainability of investments necessitates driving public policy that fosters the growth of investee companies they hold shares in, reflecting the broader concept of “universal ownership theory”.

ESG risks and sovereign bond investments

ESG risks in investments are not limited to equity investments. For instance, sovereign bond investors need to engage with policymakers to ensure the reduction of reputational, operational, and regulatory risks resulting from a failure to address such risks. For instance, development of regulations that require corporate reporting on ESG policies and practices facilitates investors’ monitoring and managing their portfolios’ ESG risks.

Investor influence on government

Although investors are powerful stakeholders in corporations, they often lack direct influence over governments. The government’s concentration is mostly on its constituents, who are the voters. On the other hand, corporations attend more to the investor’s demands due to the stronger voice the investors have in corporations.

Challenges to collaborative sovereign engagement

Investors report on several challenges in engaging with sovereigns. For instance, investors’ limited influence on government decisions, difficulty in accessing government officials, and possible accusations of interfering with national sovereignty are prevalent. In addition, the longer-term horizon of policy engagement, the need for capacity building for investors and governments, and the difficulty in escalations measures are critical challenges investors face.

Engagement recommendations

To tackle the barriers to effective engagement, interviewees suggest that investors collaborate with policymakers, adding legitimacy and financial clout to the initiative. In addition, sovereign debt investors should be included in the group since they have a more direct link to governments and may already have contacts and knowledge of the local contexts. Engagement requests must be specific and tangible to track progress, and there should be a structure to provide process support to the coalition.

Conclusion

Investors conduct policy engagement to comply with their fiduciary duties, manage investment risks, and an enabling environment for sustainable investments. Governments will benefit from understanding the investment community’s demands, providing inputs on how sovereign entities can reduce risk perception, improve business environments, and attract private investments. The findings highlight investors’ challenges in engaging with governments and point to the need for capacity building to tackle these challenges. The paper contributes to the sustainable finance and public policy literatures and analyses a new form of investor activism, offering insights and recommendations to policymakers and the investment community.