When trying to marry your ethical or environmental concerns with investing, it can be tempting to focus on companies and projects that feel exciting or that reflect your own spending habits. These might include, for instance, eco-tech startups, sustainable fashion labels or new plant-based food businesses. As well as better capturing our imaginations, many of these companies will have also built sustainability into their business models from the outset.
While smaller startups offering solutions to pressing sustainability and ethical issues are undoubtedly deserving of financial support, some could take years to scale. By contrast, larger, more established companies might be less exciting, but their actions can potentially be more impactful thanks to their financial muscle and market clout. Shareholder engagement with them to accelerate their shift to greener, fairer ways of operating can often have an outsized impact on wider global efforts by dint of their sheer scale.
For instance, investor pressure on them to reduce their carbon emissions or tackle other environmental, social or governance (ESG) issues can have far-reaching repercussions because big, mainstream companies usually have larger supply chains.
Likewise, they can more readily afford the capital expenditure needed for ambitious projects, such as carbon capture technology. And while corporate behemoths tend to be less nimble, their size and firepower can mean that their actions ultimately have a more rapid effect on the world than would be the case if we waited for them to be supplanted by smaller startups.
“Larger companies are more likely to be in the public eye and thus susceptible to media, consumer and political pressures,” says Peter Elwin, director of fixed income at the financial thinktank Planet Tracker. “[This] can provide leverage to investors who are willing to go public with their ESG requests in a way that might not be possible with smaller companies.”
Elwin also notes that it can be easier for shareholders to coordinate their engagement with larger, more mainstream companies as those companies generally feature in more investment portfolios than smaller ones: “It can be easier to get other investors to collaborate, whereas with a smaller company it is much more likely that fewer investors have any financial exposure to it in their portfolios … and thus no interest in engaging.”
Engagement by investors has already triggered big changes at some of the world’s largest firms. HSBC plans to phase out financing for coal companies after a campaign by the bank’s shareholders, and the chemicals company BASF has set a net zero target following engagement with concerned shareholders. In May, the small activist investor Engine No 1 won three seats on the board of ExxonMobil as part of an effort to force the firm to reduce its carbon emissions.
Furthermore, boards will often look to resolve issues directly with shareholders behind closed doors rather than let their concerns develop into an embarrassing public spat. HSBC’s proposal to phase out coal financing came after months of negotiations with large investors, for example, and led to the withdrawal of the original shareholder resolution that prompted the bank to take action. Shareholder resolutions can also empower board members and others within the company who have been advocating for change.
“Financial organisations, such as pension providers, have substantial funds invested in some of the biggest companies in the world. As such, this grants them real influence over corporate strategies and behaviours,” says Tracy Walsh, a partner and head of ESG at the law firm Womble Bond Dickinson. “ESG investing presents a genuine way for these institutional investors to be a real force for good in the world.”
If engagement doesn’t deliver the desired results, investors may decide that selling the shares is their only remaining option. However, divestment comes at the price of an ongoing say in how the company operates. There is also the danger that investors with fewer environmental or ethical scruples will snap up the shares. The question about whether it’s better to to divest or engage has therefore become a key debate. Exit vs Voice, a 2020 study, found that engagement is ultimately more effective in pushing companies to act in a socially responsible manner.
And just as ESG action by larger, more established companies can have a bigger impact, the same can apply to the pension and investment firms that engage with them. “In general, having a larger holding in terms of votes will gain more attention from the management of a particular company,” says Elwin. “But the investor’s willingness to engage actively with management and in shareholder meetings will also be a significant factor.”
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