Collaborative engagement

Many existing stewardship codes also support this concept of shared dialogue with investee companies. This typically involves multiple investors engaging the same company, or investors joining forces to engagement many companies on the same ESG issue.

When done well, collaboration can be an effective way to gain corporate managers’ attention, as well as to pool knowledge, information and engagement costs. Speaking to issuers with a unified voice also typically results in a more informed and constructive dialogue. Complex market transformation is also more likely to be achieved through an alliance of investors rather than a single institution – even a large one – acting alone. Academic analysis of major investor engagements shows that collaboration among investors has been instrumental in increasing the success rate of engagements on environmental and social issues.

Success rates are elevated by one third when a single investor, located in the same geographic region as the targeted firm, leads the dialogue. Investor influence is also crucial; success rates are higher when there are more participating investors, as well as when they have larger assets under management, and when they own a bigger proportion of the target company. This is particularly important when investors are engaging across national boundaries.

While collaborative engagement is a tried and tested means of engagement for shareholders, for most bondholders, bilateral engagement with an issuer is still the most common approach: 91% of corporate (financial) and 89% of corporate (non-financial) bond investors reporting on their engagement activities state they do so bilaterally. To date, there are far fewer examples of collaboration by bondholders compared with shareholders. Bondholders that do collaborate are typically focused less on ESG issues and more on issues such as unfavourable bond clauses, which offer fewer protections to bondholders, or scenarios where groups of bondholders engage to bring about a debt restructuring.

Fixed income investors interviewed by the PRI acknowledge that there could be scope for them to engage more collaboratively in future, particularly where it relates to systematic requests such as standardising and enhancing ESG-related disclosure, or encouraging continuous improvement in ESG policies and practices. Aside from collaborating alongside other bond and equity holders, fixed income investors may also engage regulators, policy makers, banks, credit rating agencies and other stakeholders. Experience suggests that fixed income investors could benefit substantially from engaging collaboratively, but they need to weigh this approach as it can also present challenges.

Challenges

While collaborative engagement has a number of advantages, it is not always appropriate, and it brings its own unique set of challenges.

• Reaching consensus: Investors involved in collective engagements will not always have the same desired outcome or interest in the target issuer(s). This can lead to a confused message to issuers. Bondholders in particular face a challenge of engaging a single company but owning debt of different tenors potentially issued by different parts of that company. They may have different objectives as the materiality of specific ESG issues will vary over different time horizons. If a compromise cannot be reached, the group may only be able to agree on the most attainable goal, which may leave those with more ambitious aims dissatisfied.
• Coordination costs: Costs can include time spent coordinating the group’s activities, helping the group to build consensus and a common position, and making sure that each member is well informed throughout the engagement process. These costs can be borne by the investors leading the alliance, or by a third party which acts as facilitator of the collaborative initiative. 
• Regulatory barriers: Investors may encounter regulatory barriers relating to controlling bids and anti-trust. An example is acting in concert legislation in some markets, where legislators have not specified that collaborating to foster dialogue on ESG issues is not breaching the law. For further discussion on the opportunities for and challenges to collaborative engagement from a legal perspective, see the Appendix.
• Collective action issues: Similarly, while many investors may sign a collaborative initiative, some may not substantially contribute to the project, leaving it to a smaller group of committed investors to do all the work.
• Bondholder identification: One practical challenge is that can be difficult for bond investors to identify fellow bondholders, as publicly available bondholder information may only contain a subset of bondholders’ identities, and is often out-of-date. There is no regulatory requirement for fixed income investors to disclose their identities or holding amounts. The trustee that represents the interests of all bondholders is not always able to provide bond issuers with a list of bondholders either. There are, however, systems which allow bondholders to communicate and work with fellow bondholders on an anonymous basis.