Private Shareholder Engagements on Material ESG Issues

Do private talks with companies about ESG issues actually pay off?

Rob Bauer, Jeroen Derwall, and Colin Tissen analyse 14 years of private ESG engagements with 2,465 listed companies in their paper « Private Shareholder Engagements on Material ESG Issues ».

They differentiate cases addressing financially material ESG issues versus those deemed immaterial to the firm’s business and track which engagements achieved their objectives and how target firms performed afterward.

Their conclusions include:

• The majority of engagements (75+%) focused on financially material ESG topics and were far more likely to succeed than engagements on immaterial issues.
• Targets of successful engagements on financially material ESG issues showed a positive cumulative abnormal stock return of about 2.5% over the 14 months following a successful material engagement, relative to similar companies without such engagement.
• Firms where engagements on material issues succeeded later exhibited better operating performance like higher profit margins and returns on assets, and lower cost ratios relative to firms where engagements did not succeed or addressed immaterial topics.
• Companies targeted on environmental topics significantly reduced their carbon intensity after the engagement.
• Private engagements consisting of a single contact (one letter, call, or meeting) had a success rate close to 1%, whereas sustained engagements with multiple interactions reached nearly 45%.
• Using more intensive methods, like in-person meetings rather than letters, and collaborating with other shareholders likewise raised the probability of success.

This article shows focusing on financially material ESG issues in engagement strategy fosters both meaningful ESG changes and stock performance.

Asset managers should consider teaming up with other investors on material ESG issues, which financial analysts may interpret as a positive signal about a firm’s future performance and risk management.

The authors caution that while they observe correlations between engagements and outcomes, causality remains difficult to prove: firms inclined to improve might both engage constructively and perform well.

Moreover, the paper doesn’t assess whether targeting only financially material issues is optimal for achieving public good, and question of « double materiality » is left for future research.