Over the last decade, investors have become increasingly concerned with the environmental and social impact of their investments across asset classes. Given the large social and environmental footprints of publicly traded corporations, and the persistently high allocation to public equities in most investor portfolios, public equity investing presents a major opportunity for impact investing. Yet impact investing, as currently practiced, concentrates primarily on small-scale direct investments in private equity and debt. Many investors perceive that social and environmental impact can be more readily observed there than in publicly traded companies, where ownership is intermediated, diluted, and diffused through secondary capital markets.
A new report, “The Impact of Equity Engagement: Evaluating the Impact of Shareholder Engagement in Public Equity Investing,” seeks to change this perception. Authored by researchers at Croatan Institute, and overseen by a steering committee including representatives from Boston Common Asset Management, Calvert Investments, Clean Yield Asset Management, Green Century Capital Management, NorthStar Asset Management, Pax World Management, Tides, Trillium Asset Management, and Walden Asset Management, the report presents the initial findings of the Impact of Equity Engagement (IE2) initiative. It also proposes a new, rigorous reporting framework to standardize and facilitate reporting of shareholder engagement activities.
For decades, investors have been engaging in the proxy process, dialogue with portfolio companies, public policy, and even assertive action like litigation or divestment campaigns. But can shareholder action really increase women’s representation on corporate boards? Can investor voice contribute to safer working conditions for workers in Bangladeshi textile factories? Can shareholder engagement around the issue of palm oil sourcing lead to decreased development of plantations on peatlands and thus preserve important carbon sinks?
Our research has found that investor engagement with public companies can in fact create these positive environmental, social, and governance outcomes. Yet investors currently have no standardized way to demonstrate this impact to their clients, donors, or stakeholders.
Shareholders engage with public companies in a variety of ways, ranging from casting proxy votes, to signing investor letters, to organizing multi-year public campaigns in collaboration with civil society stakeholders. The IE2 engagement reporting framework will allow investors to track and report all of their engagement activities. It will also let investors analyze their own activities, identifying which factors predict a change in corporate behavior. Finally, it will promote academic and industry research on shareholder engagement by compiling an anonymized database that can be analyzed to identify best practices and maximize investor leverage.
The nature of impact within public equity investing remains poorly understood and insufficiently documented. Because of this, many investors may be overlooking readily available opportunities for generating impact within their existing investment portfolios. This new reporting framework for public equity engagement can help investors track and report on the impact of their own engagements—and, eventually, to identify and analyze industry-wide best practices for positive impact.