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Power in Numbers: Can Impact Investing Increase Shareholder Engagement in 2020?

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Gwen Le Berre

Director, Responsible Investing

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As millennials continue to drive more interest in responsible investing, what used to be a niche investment style has become increasingly more mainstream.

This growth in popularity has dramatically changed the role responsible investing plays in portfolio construction. No longer do investors think of responsible investing strategies as a siloed part of their portfolios. Instead they’re using ESG as one of the fundamental factors to evaluate every investment.

Another epiphany that has emerged over time is the power of shareholder engagement as a tool for influencing corporate behavior and guiding public equities toward more sustainable, long-term returns. Let’s look at shareholder engagement and its relation to impact investing for 2020.

What is shareholder engagement?
Shareholder engagement takes place when investors have direct communication with a company’s management or board of directors to better understand the company’s position on particular topics. In the past, shareholder engagement could encompass various forms of communication such as proxy voting, attending analyst conference calls or quarterly earnings calls, or writing letters to the board. In recent years, however, the definition of shareholder engagement has evolved to typically mean one-on-one conversations between shareholders and companies. When investors aren’t satisfied with the way companies are managing their ESG risks and opportunities, they tend to seek influence over the company’s direction.

Shareholder engagement is not a new activity. Investors have been looking to engagement as one of the tools at their disposal to fulfill their fiduciary duties for decades. Today’s investors see it as an even more powerful tool—one that can have a direct impact on corporate behaviors and business activities, and therefore, general society.

Shareholder engagement in action
Shareholders who seek to influence companies can sometimes make a bigger impact than expected. Below are two examples of just how much influence shareholders can have over the direction of a company’s behaviors and activities.

According to the Centers for Disease Control and Prevention, roughly 130 Americans die from opioid overdoses every day. This alarming statistic led 54 investors to form a watchdog crisis coalition called Investors for Opioid Accountability (IOA). Since 2017, this group has been engaging with pharmaceutical companies to better understand how reputational and litigation risks that come with manufacturing and distributing opioids are managed. When IOA was unable to convince the management of multiple companies to produce board risk reports, they filed shareholder proposals that garnered majority support from investors at Walgreen’s, Rite Aid, and AmerisourceBergen.

Another priority for many mainstream investors has been board composition. Corporate boards have been accused of being "pale, male, and stale," and not representative of the larger population. Over the past several years, investors have become increasingly more vocal about their expectations to see more women on boards. Some have put forward shareholder proposals, but most of the initiatives have involved letter-writing campaigns and direct engagements with board members behind closed doors. We are still far from seeing gender equality in the boardroom, but the fact that the average number of S&P 500® female directors has risen from 17% in 2012 to more than 27% today shows much progress.

Both examples show the potential power of shareholder engagement through taking initiative and being persistent. The possibility of having a positive influence on a company or society gives responsible investors incentive to make shareholder engagement a portfolio priority.

Why is shareholder engagement picking up steam? Think impact!
Investors have been clamoring for more impact investing opportunities—strategies that not only provide returns but also have an eye to impart positive influence on society or the environment. How to go about achieving both of these goals is up to the investor.

Impact investing means different things in various asset classes. A fixed income investor might invest in a renewable energy project while a private equity investor might allocate capital to a startup that’s finding ways to improve health outcomes or increase energy efficiency.

In the public equity space, impact investors strive to invest in companies to help them do the right thing by their various constituents—such as their clients, employees, and communities—while generating long-term sustainable returns. However, portfolio construction is unlikely to have a large effect on company conduct or activity. Additionally, public equity markets are mostly secondary markets where investors buy and sell stocks they already own, which means the company doesn’t directly see the impact of the transaction.

If you’re a public equities investor who’s interested in both company share performance and company behavior—and you’re in search of a leverage tool that may nudge your corporate investments in a positive direction—active ownership in the form of shareholder engagement might be your best bet.

Today, we are at a tipping point where more investors are either taking action themselves or asking their asset managers to step up to the plate to take a more proactive approach in their engagement activities with companies.

The bottom line
As more investors demand to understand how their investing activities impact communities, it’s become evident that the most effective way to have impact in the public equity markets is through shareholder engagement. With the increased appreciation for the power of shareholder engagement, we can expect 2020 to be full of examples of emboldened investors finding their voice. 

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