This technical report provides an in-depth analysis of collective investor impact mechanisms in secondary markets, specifically focusing on collaborative engagement and price signalling. It highlights how these mechanisms, when employed by multiple investors, can be more effective than individual efforts in influencing corporate behaviour and driving positive ESG (Environmental, Social, and Governance) outcomes.

Introduction

The report outlines two primary collective impact mechanisms that are particularly relevant for public markets: price signalling and engagement. Both mechanisms are essential tools for investors looking to enhance their influence, as single investors—regardless of size—are unlikely to achieve significant change on their own. The report reviews the empirical evidence and theoretical frameworks supporting these mechanisms, providing investors with insights into when and how to utilise them effectively.

Collective impact mechanism #1: Collaborative engagement

Collaborative engagement involves a group of investors joining forces to engage with companies on ESG issues. This approach offers several advantages, such as pooling resources, reducing costs, and increasing influence through a collective voice. The report underscores that this method is more resource-efficient than individual efforts, particularly given the resource constraints most investors face.

Several successful investor coalitions, such as Climate Action 100+ and the Asia Investor Group on Climate Change, demonstrate the effectiveness of collaborative engagement. Key success factors include aligning objectives across participants, having a clear escalation policy, and exercising full shareholder authority. Notably, research indicates that larger, more resource-rich investors, such as the Big Four fund managers, significantly enhance the success rate of these efforts.

One important recommendation is to mix global and local investors in coalitions. Studies show that local investors bring advantages in terms of access to management and cultural understanding, while global investors provide the clout necessary to drive change in large corporations. The involvement of the Big Four fund managers is also crucial for achieving success in collaborative engagement, as their significant capital base allows them to influence the majority of large firms.

Collective impact mechanism #2: Coordinated price signalling

Coordinated price signalling refers to the collective efforts of investors to influence the price of securities through shared actions, such as investment flows into or out of companies based on their ESG practices. However, the report highlights significant hurdles in achieving real-world impact through this mechanism. For instance, it would require a substantial capital allocation—at least 10% of a company’s market capitalisation for equity investors or 27% of a company’s outstanding debt for bondholders—to create a meaningful impact on corporate investment decisions.

The report argues that coordinated price signalling is difficult to implement successfully due to the size and liquidity of sustainable investment segments within equity and bond markets, the poor responsiveness of managers to cost of capital changes, and the lack of clear market signals. Despite these challenges, the report suggests focusing on narrow market segments and using ESG indices as the most relevant mechanism for generating collective impact through price signalling.

Practical conclusions

The report concludes that while both collaborative engagement and coordinated price signalling can drive impact, collaborative engagement is the more reliable and achievable strategy. It offers clear recommendations to improve the effectiveness of collaborative efforts, such as organising coalitions with experienced investors, focusing on material ESG issues, and aligning engagement goals across participants.

Conclusion

Overall, the report emphasises that collective investor action in secondary markets can deliver significant ESG impact, provided that the right mechanisms and strategies are in place. Collaborative engagement is the most promising avenue for financial institutions aiming to drive positive change, while coordinated price signalling remains a more complex and challenging strategy to implement successfully. Investors should focus on forming well-structured coalitions, leveraging their collective power, and aligning their efforts to increase their chances of success.