How engagement creates value for investors and companies: Relationship building

ESG engagement encourages closer collaboration between ESG and financial analysts and/or fund managers. In addition, the relationships between investors and companies support the integration of ESG, in a self-reinforcing manner, within both investment firms and companies.

The benefits companies and investors derive from relationship building are complementary (see Table 1). In line with the results of O’Sullivan and Gond (2016), the ‘enrolment of experts’ and the ‘elevation of sustainability’ on the corporate side mirror the mobilisation of engagement by ESG analysts operating within institutional investors, which enables and facilitates their ESG integration efforts.

“Portfolio managers are becoming much more aligned with integrating ESG issues into their investment decisions. Over the past two years, there’s been a huge shift internally in terms of how they are taking these issues into account.”

Asset Owner commenting about his observations of the asset management firms he is working with, UK

We believe the common goal of developing long-term relationships can only reinforce the process of alignment of corporate and investor expectations.

The main noticeable difference between the two parties however, concerns the fact that investors, and in particular asset managers, can also easily consolidate their position vis-a-vis key clients and/or beneficiaries through engagement, notably by delivering on their fiduciary and stewardship duties. However, the value of investor-corporate relationships around ESG for corporate marketing purposes is less obvious and direct.

Table 1. Mechanisms of Engagement Value Creation

VALUE CREATION DYNAMICS	CORPORATIONS	INVESTORS
COMMUNICATIVE EXCHANGING INFORMATION	Clarifying expectations and enhancing accountability	Signalling and defining ESG expectations
	Managing impressions and rebalancing misrepresentations	Seeking detailed and accurate corporate information
	Specifying the business context	Enhancing investor ESG communication and accountability
LEARNING PRODUCING AND DIFFUSING KNOWLEDGE	Anticipating and detecting new trends related to ESG	Building new ESG knowledge
	Gathering feedback, benchmarking and gap spotting	Contextualising investment decisions
	Developing knowledge of ESG issues	Identifying and diffusing industry best practice
POLITICAL DERIVING POLITICAL BENEFITS	Enrolling internal experts	Advancing internal collaboration and ESG integration
	Elevating sustainability and securing resources	Meeting client expectations
	Enhancing the loyalty of long-term investors	Building long-term relationships