Engaging with businesses over their environmental, social and governance (‘ESG’) decisions is a “much more effective strategy” when influencing their behaviours than divesting from the companies altogether, according to Michael Cappucci, Senior Vice President of Sustainable Investing at Harvard Management Company.
“There is (a lot) of evidence that engagement can be very effective in improving the incentives and performance of companies on a number of different factors, including things like ESG,” Cappucci said in a podcast with Jason Mitchell, Co-Head of Responsible Investment at Man Group. “We found that those are much more productive conversations when you come at it from a much more neutrally conducive perspective than as somebody who has declared a whole industry evil and off-limits.”
Indeed, corporate engagement and shareholder action is the third-largest sustainable investment strategy globally as of 2016, according to the Global Sustainable Investment Alliance (‘GSIA’). Between 2014 and 2016, GSIA estimates that the volume of assets managed with explicit commitments to engage or vote on ESG issues grew by 41% to USD8.4 trillion. Expectations are changing such that even non-dedicated shareholder strategies are increasingly under pressure to demonstrate their engagement activities.
Figure 1. The Growth of Sustainable Investment Strategies, 2014-2016
Source: 2016 Global Sustainable Investment Review: 2014-2016.
“When you make a public decision to divest from either a company or an industry, that’s kind of the end of the conversation in a lot of ways,” Cappucci said. “You’ve chosen not to pursue something and the flipside to that is that those companies are not going to talk to you about improving their practices.”
To listen to the full podcast go to man.com/ri-podcast
Cappucci’s article on the ESG Integration Paradox can be found here.