Learning dynamics

Learning dynamics: Creating value by producing and diffusing knowledge 

The reinforcement of the communication channels between investors and their investee companies through ESG engagement also creates new opportunities for learning about ESG issues on the corporate side. Several of our corporate interviewees found that dialogues with investors – and in particular specialist ESG investors – can help anticipate new ESG trends in the financial marketplace.

“I think of ESG investors, particularly in extractive industries, as an early warning system. They’re the canary in the coal mine. You know they’re ahead of everyone else in terms of their thinking about what a problem is and what a risk is. Eventually, governments, civil society and mainstream investors will share the same concerns.”

SD, Oil & Gas, Canada

In this regard, engagement can help corporations to identify emerging trends or weak signals from the broader socio-political environment within which they operate. Although not all informants recognised this role for investors, most interviewees agreed that engagement helps to make sense of changes in investor ESG preferences.

Getting feedback, benchmarking and gap-spotting  

Recognising that ESG engagement is a two-way street also means that companies can use this communication channel with investors strategically to get feedback to advance their sustainability strategy. Several of our corporate interviewees use ESG engagement to actively seek advice from investors on, for example, how to develop their ESG strategies, management systems, or programmes. A small number of corporate interviewees acknowledged cases in which an investor spotted an important gap in their ESG strategies or management systems, which could be addressed in a timely fashion thanks to engagement.

In addition, these engagements can be useful for companies to understand “how they see us compared to our peers,” as one interviewee from a German chemicals company put it. These investors were also frequently cited as a source of information about best practices within and beyond a company’s industry sector: “We want their advice because they see more than we do,” said a sustainability executive at a UK mining company.

However, not all of our interviewees share the view that they can learn from investors about how to improve their ESG management system or strategies, as investors are sometimes perceived as insufficiently knowledgeable of ESG issues to conduct a relevant engagement. Yet, at the same time, no interviewee challenged the view that “there is always something to be learned” from such dialogues.

“[ESG investors] can give us tips to improve either our strategy or the way we are communicating our strategy. In that sense, I consider that these interactions with investors are very important to us.”

SD, Mining, Brazil

Developing knowledge of ESG issues

Engagement dialogues with investors can help companies further enhance their knowledge of ESG issues. For example, in the context of an ESG controversy triggered by a new practice (e.g. hydraulic fracking in the oil and gas industry), ESG issues can be difficult to evaluate with certainty (e.g. risks of water pollution or health and safety issues for local communities). In these uncertain circumstances, knowledge about ESG issues can be shared among the actors involved (e.g. NGOs, academic experts, companies and investors).

In such contexts, collective forms of ESG engagement, which usually bring third-party experts into the dialogue, provide opportunities to develop deeper knowledge of ESG issues. But corporations can also develop their own knowledge of ESG issues in the context of individual ESG engagements by interacting with ESG analysts within the investors engaging them, thus benefiting from unique insights from these ESG experts. A sustainability expert at a Canadian oil and gas company, who learnt from ESG investors how to present an advanced ESG practice to a wider investor audience, offers a case in point. She explained that mainstream investors were sceptical about the company’s investments in renewables, which weren’t generating the same rates of return as its oil sands operators: “We were able to work with ESG investors to ask, how we might close that gap? How do you communicate this with mainstream investors? What would make this business more financially attractive?”

Learning opportunities across companies and investors

“In many cases, our engagement is not necessarily looking to force change. It may also be about deepening our understanding.”

Asset Manager, UK

A comparison of learning opportunities, as presented in Table 1, suggests that different benefits may arise for investors. Even both sides report a greater understanding of the management of ESG issues, investors are likely to benefit more from this process, especially in the context of collective engagements such as the ones organised by the PRI, that provide access to ESG experts and NGOs. Investors can enhance their own knowledge of ESG in specific industries by engaging with multiple companies and interacting with other investors. “When there is a huge emerging issue with an issuer, we really need to work together with other investors to understand more and to form best practices,” noted one French asset manager.

A better understanding of corporate ESG contexts can improve investment decisions. On the whole, our analysis of learning opportunities suggests that investors’ role in the detection of emerging ESG trends, and their attempts to diffuse ESG best practices within and across industries, can directly nurture corporate learning opportunities.