A well-known impact investor is calling on its peers to be more transparent about cases in which they fail to influence companies during shareholder engagement.
In a report about the effectiveness of stewardship on sustainability outcomes, published last week, WHEB said that “unsuccessful engagements are all but inevitable, and there is value in showing why and how engagements did not succeed”.
While engagement efforts have been on the rise in recent years, as investors seek to demonstrate their contribution to society’s environmental and social goals, the focus has been on showcasing success stories.
WHEB noted that, while case studies about individual victories can be useful, they can also “mask a lack of either a good engagement framework or a consistent effort across a portfolio” and should be published alongside broader, quantitative data.
“We also believe there is value in reporting on engagement work that is ultimately unsuccessful.”
Quantity vs. quality
The asset manager said “asset managers and owners have historically tended to prioritise quantity of engagement over quality,” adding that the former was often used as a proxy for the latter.
The trend is partly driven by resource constraints, WHEB noted.
The report observes a tendency for many investors to take a ‘fire-and-forget’ approach to engagement, “involving high-volume, low-quality efforts such as mass distribution of poorly-prepared letters or joining collective initiatives with minimal involvement”.
It questioned the idea that “a mere act of communication by an investor to an investee company represents an engagement”, arguing: “Activity reporting without outcomes is like counting the steps taken in a race and not reporting who won.”
However, it noted, engagement can send effective signals to companies about sustainability issues without achieving a direct result.
WHEB believes, for example, that a letter it sent to one of its portfolio companies, Daikin Industries, may have contributed to a decision by the firm further down the line to cease the production of artillery shells containing white phosphorous, despite not hearing back from it at the time.
NGO interests
The report also highlighted a potential misalignment of interests between institutional investors and the service providers and NGOs that often support their engagement efforts, saying “there is a risk that these third parties end up undermining effective engagement”.
“Investors should be most concerned with outcomes that are aligned with the clients’ objectives,” it said. “Not-for-profits and engagement service providers may have other motivations.”
It suggested that “NGOs are generally ambivalent about the success of individual companies”.
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