Article
01 Apr 2021

Boosting ESG Engagement: Why? How?

Global Insights
Contributor(s): Citi Global Insights
We summarize the key themes from recent report by Citi’s ESG analyst, Anita McBain, in which she discusses some of the most frequent investor queries that she and her team have fielded globally across asset classes and geographies.

Anita provides a set of questions for investors to consider to boost engagement with ESG strategies. These questions cover a range of topics from environmental issues, biodiversity loss and deforestation to cyber security, modern slavery and effective climate governance.

Even as investors have made great strides with regard to ESG integration, they still question what good ESG engagement looks like. In her report, Anita shares the types of engagement questions that investors and ESG stewardship teams can consider, built on a strong foundation of scientific, academic and regulatory frameworks. As well as creating value and promoting the exchange of ideas, Anita notes that engagement on ESG issues can “unpack the dynamics from which multiple forms of value are created for corporations and investors”. Increased engagement can also lead to behavioral change by encouraging corporations to be part of the carbon transition. This engagement is a key element of both successful stewardship of assets and prevention of value deterioration.

Changing Regulation and Key Frameworks

In the EU, the Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021 requiring market participants to disclose on ESG issues. This legislation requires companies in scope to classify products on which they advise into three categories:

  1. mainstream products,
  2. products promoting environmental or social characteristics and
  3. products with a sustainable objective.

Anita notes that the aim of this legislation is to prevent greenwashing and to systematize ESG disclosures in the region. A similar disclosure regime is widely expected to follow in the UK.

A number of frameworks also have been instrumental in guiding both investors and corporates on the best steps that they can take to achieve their sustainability goals, especially around environmental action. Initiatives such as the Carbon Disclosure Project, Transition Pathway Initiative and Science Based Targets Initiative have spurred corporate disclosures and enabled investors to understand and account for risks and opportunities.

Two Models of Engagement

There are two models of ESG engagement:

  1. bottom-up, whereby individual company engagement seeks to change individual company behavior, and
  2. top-down, whereby thematic approaches are more suitable for delivering at scale and facilitating passive investment.

In the case of thematic approaches, a number of themes must be addressed, and the Sustainability Accounting Standards Board (SASB) provides a map of these relevant themes.

The E, S, and G of ESG Goals

Successful engagement strategies must have clear goals.

E: To begin laying out such goals, one theme to begin with is environmental goals. To achieve the long-term goals committed to in the Paris Agreement, investors must consider energy management and emissions targets. Environmental engagement should also reflect the priorities of preventing ecological loss and fostering biodiversity.

S: Under the S of ESG, investors can also demand disclosure on modern slavery in the supply chains. In this regard, the quality of company disclosures will depend on the quality of data from suppliers and their own supplier assessments. Investors should also engage on cybersecurity and the resilience of the supply chain.

G: Governance is a third important element of engagement and one with which companies are often familiar. Engagement with the C-suite is critical to understanding governance priorities but also to revealing how seriously a company takes resilience and sustainability goals.

As Anita notes, any successful engagement framework will have clearly articulated goals and objectives, defined activities and outcomes that evidence a robust and rigorous process.

 

For more information on this subject, please see ESG & SRI: What Issues Should Investors Prioritise? Boosting an ESG Engagement Strategy.

 

Disclaimer

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.

 

 

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