My shareholder engagement illustration by Gerd Altmann from Pixabay
Before starting my shareholder engagement activities in 2022, I had been very skeptical if such engagement could bring significant changes. After trying to engage with more than 60 companies worldwide, I am a little less skeptical. Here are some experiences and learnings for the future:
Experience: Up to 97% response rates with some lengthy processes
I am positively surprised that more than 80% of the companies I tried to engage with replied to me. Currently, I am in more or less active discussions with 29 out of my 30 companies (97%) investments (see monthly “engagement report” here).
I manage a very small German fund (see My fund)- a fact that I disclose in my first contact email – and I addressed companies in the US, Canada, Australia, Singapore, Japan and several European countries. Overall, the response rate to my engagement trials is much higher than I expected.
One reason for that success may be that I mainly addressed rather small exchange listed companies (small- and some midcaps) which may not have had many direct sustainability focused shareholder discussions in the past. This has been confirmed by some of my new corporate contacts.
Another reason may be that I sent my initial requests to investor relations (IR) employees and not to the top management of the respective companies. Instead of writing my emails to an anonymous investor relations email address, I tried to find out the emails of the responsible people for IR on the companies’ websites or via LinkedIn. I also – often successfully – attempted to establish LinkedIn contacts to the respective investor relations people very early in the process.
When I did not get feedback to my initial emails, I sent up to six reminders. If investor relations did not answer, I sought to address the top management of the companies or the responsible managers for sustainability topics.
With several companies it took months before I received the first reaction to my emails. Even if the answer to my first email was helpful, meaningful replies to my follow-on emails which included much more detailed proposals than my initial emails sometimes required several reminders.
3 to 6 shareholder engagement topics per company
After an exploratory shareholder engagement in 2022 (see: Engagement test), I defined a detailed engagement policy. In that policy I document based on scientific evidence, why I ask which question and how I want to engage other stakeholders (see Shareholder engagement: 21 science based theses and an action plan and – yearly updated – here in German).
In my subsequent engagement processes I addressed between three and six different topics per company. The six topics are:
- GHG Scope 3 emission disclosures
- CEO pay ratios
- EU Taxonomy and/or SDG-revenue reporting
- Employee ESG surveys
- Customer ESG surveys
- Supplier ESG evaluations
For all 6 topics I include up-to-date scientific evidence and best practice examples when I contact the companies I am invested in (see e.g. HR-ESG shareholder engagement, Supplier engagement, Customer ESG engagement).
EU Taxonomy and/or SDG revenue reporting was the topic which I asked for the least number of companies. The reason: Currently, EU Taxonomy reporting is only relevant for ecologically related revenues and not for the many social companies in my fund. Also, the European based companies typically already report such revenues anyhow. So far, I have not convinced additional companies to report EU Taxonomy revenues. And SDG-revenues are now reported by my ESG-data provider Clarity.ai, so that I do not have to ask companies directly for it anymore.
CEO pay ratios have to be reported by US and UK based companies by law and a few other companies report them voluntarily. At least one of the companies I have addressed regarding this topic now reports the CEO pay ratio.
I suggest monitoring the CEO pay ratio, because many companies now include sustainability elements in their top management compensation plans and I suspect that this leads to increases in the pay differences between top management and average employees. So far, I have not found good research regarding this topic, though.
Broad Scope 3 GHG emissions data is only reported by few small- and midcap companies, therefore I had to ask more than 60% of my investee companies for this information. One IT-company argued that Scope 3 GHG data is not relevant for their industry. I replied that important companies within that industry such as SAP publish Scope 3 data. I am still waiting for their response.
Today, a few more of my investments now publicly report Scope 3 GHG data, but I cannot claim that this is because of my shareholder engagement since most of the companies have apparently understood how important Scope 3 GHG data is.
1.9 out of 5: Little stakeholder engagement progress so far
With regulatory pressure to increase the transparency of supply chains, sustainability evaluations of suppliers become more important. So far, many of the companies I am invested in include ESG-criteria in their evaluation processes for new suppliers. In addition, some ESG-elements such as supplier adherence to their codes of conducts are also required from major existing suppliers.
I recommend to my investee companies to regularly evaluate all significant suppliers based on complete and independent ESG-assessments. Some of the companies that I am engaged with have started to move in this direction. Very few though want to follow my recommendation to regularly publish results of such evaluations.
Most companies seem to understand that employee satisfaction is important and that many employees consider ESG-elements as important for their satisfaction. Today, regular and broad employee surveys are implemented within many companies. These surveys often include some ESG-elements, particularly social ones. Some of the surveys are conducted by independent third parties and overall satisfaction scores are often reported regularly.
Several of the companies I addressed seem to be open to include more ESG-elements in their internal employee surveys, but very few are open to publish their results. The publication of aggregated results such as the overall ESG-satisfaction is very important, though, for current employees, job seekers and other stakeholder groups such as investors, in my opinion. Even if the first survey results are not so good, interested parties can see that the companies are interested in employee ESG satisfaction and are willing to improve it.
Regular customer ESG-satisfaction surveys and the publication of their results have been the proposal with the least positive feedback so far.
To measure my shareholder engagement success, I created a scale from zero to five. Monthly, I update and publish the status of every company engagement. Overall, the status is rather stable at 1.9 which basically means “The entities fully disclosed the requested information or committed to implement some recommendations”. That is not satisfactory for me and I am pushing for more.
Unfortunately, collaborative shareholder engagement is difficult in my case since I have not found many truly sustainable investors in the same companies. Even when I found some, they were not interested in engaging together with me, often not even answering my contact trials. The inofficial comment has been: You are too small and too unimportant.
Improving corporate sustainability can be difficult (in: My shareholder engagement)
Overall, I am happy with the companies I am invested in and which I consider already very sustainable. And I am still satisfied with the topics which I selected for my shareholder engagement activities. Also, I will continue to address the investor relations departments which overall have been helpful. Some of them even organized group conference calls often including several of their sustainability experts.
What I have to make clearer going forward is that I think that, in some areas, it is still rather fast and cost efficient to become or stay a sustainability leader.
Sustainability may be defined differently by many stakeholders, but in general it boils down to a few dimensions:
- What are the negatively perceived and often excluded activities of companies e.g. regarding weapons, fossil energy, human rights, animal testing etc.?
- To what degree are companies offering sustainable services or products e.g. measured by SDG-aligned revenues?
- Are the corporate processes ESG-aligned or what is average E, S and G score of a company compared to its peers?
- Who has the most efficient corporate stakeholder engagement efforts by which a company tries to improve suppliers, customers, employees, communities etc.?
For most companies it is difficult to become better on exclusions. Example: For my mutual fund I completely exclude animal testing, but most pharmaceutical companies are obliged to conduct animal testing before they can launch new products. It is also an often very lengthy and costly process to significantly change the offered services and products so that they are better aligned with the SDGs.
Improving ESG-ratings is somewhat easier but can still be demanding and can be a lengthy process because ESG-ratings cover so many aspects and ESG-rating agencies tend to increase their requirements so that getting on top and staying there requires continuous efforts.
Corporate stakeholder engagement can be very efficient
Improving one’s sustainability-position and impression towards important stakeholders such as customers, employees and suppliers can be very efficient:
Independent and good supplier ESG-evaluations are not necessarily very costly. There are some service companies which have already sustainability-scored thousands of suppliers and those scores can be bought for a reasonable price. Creating new such scorings has also become much cheaper and faster using machine learning and artificial intelligence.
Especially improving stakeholder engagement can be rather cheap and fast. Giving technological and data-management developments, stakeholder surveys can often be implemented in cost- and time efficient ways. For corporations it should be interesting to not only know abstract ESG-scores but what the own stakeholders really think about one’s ESG position. In addition, stakeholders have first hand experiences and therefore can easily make valuable sustainability proposals.
Since I invest in sustainability leaders, I expect that these companies should score well in such evaluations. But stakeholders who have been individually asked for their ESG-opinions and improvement suggestions also very likely want to receive feedback. Instead of giving this feedback e.g. only internally to employees it is easy to publish e.g. the following results:
“In 2023, the company reached a score of 52 out of 100 in the employee ESG survey. Suppliers awarded a score of 48 and customers 50 out of 100. All surveys have been conducted by XXX, an independent company. Employees, suppliers and customers had interesting ideas how we can improve our sustainability, here are our 3 picks for 2023: …
For 2024, the management wants to implement changes so that all scores increase by 5%” (fictious sample annual report extract).
I am confident that such improvements sooner or later will lead to better stakeholder participation (“activation”) and satisfaction and also to better ESG-scores from independent agencies.
This is not completely utopian. Here are some interesting stakeholder engagement examples of the companies I have invested in: For supplier ESG assessments see CAFs 2022 Sustainability Report (pages 81-85) and Watts Water 2022 Sustainability Report (p.63), for customer ESG engagement see the Nordex 2023 sustainability report (p. 48/49) and for employee ESG engagement the Nexus AG Sustainability Report 2023 (p. 5).
Leveraging my shareholder engagement
In addition to the mentioned activities, I will continue to publish changes to my stakeholder engagement policies, monthly engagement updates by company, new related research and opinion posts on my webpages and e.g. via. LinkedIn.
Also, I am active in the Impact Working Group of the DVFA (largest German association for investment professionals).
One effect of these activities is that I can communicate and spread and therefore leverage my stakeholder engagement activities.
Disclaimer (in: My shareholder engagement)
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