This report examines whether engagement activities achieve meaningful sustainability outcomes. ESG-based engagement often centres around improving company environmental, social, and governance practices, alongside reinforcing capital allocation as a fundamental sustainability tenet. However, the report argues that engagement activities do not always deliver impactful real-world outcomes.

Why Engagement Matters

Engagement that delivers real-world outcomes needs accurate reporting and must align with investment objectives and processes. Firstly, engagement activities must focus on characteristics that impact investment outcomes, such as ESG risk, long-term profitability drivers, and underperformance. Secondly, the effectiveness of engagement must be grounded in economic duress or technological viability and offer attainable goals based on a win-win situation for both companies and investors. Finally, the engagement process should be transparent, ensuring there is a clear connection between the engagement process and investee behaviour.

The focus of engagement

ESG engagement can be distinguished amongst idiosyncratic, systemic, and impact themes. Investors should focus on systemic or impact engagement, meaning engagement goals should be targeted towards areas where investors are best placed to catalyse a desired change, playing to their strengths and limitations.

Being Realistic about Escalation Mechanisms

The mechanism and asset classes available to investors vary considerably. Investors should be transparent about their strengths and limitations when engaging with management. The prioritisation of financial and sustainability objectives in engagement activities could influence a more significant threat to each company’s profitability, risk management, and sustained ESG accountability.

Reporting Engagement: Prioritise Authenticity Over Hyperbole

The quality of engagement cannot be measured solely based on the number of interactions between investor and company. Investors should offer insights on how company actions and inaction may affect valuations, credit ratings, portfolio positions, and buy and sell decisions. Reporting engagement activities should also accurately reflect the impact of engagement activities on the company’s specific performance and be accompanied by a detailed explanation of the underlying investment views.

The report gives several recommendations to investors looking to engage with ESG principles to improve sustainability practices. Investors are advised to focus on broader engagement objectives while aligning them with their investment objectives to capitalise on achievable, value-enhancing outcomes that will benefit both parties. To avoid overpromising, investors must be transparent in their engagement commitments and manage expectations realistically. They should also be transparent about the escalation mechanisms available in various asset classes so that the level of impact of their engagement objectives can be readily assessed.