The Rise of Engagement: Opportunities for Wealth Managers

Markus Werner, Head of Intermediary Business, and Christopher Greenwald, Head of Sustainable Investing at LGT Private Banking, share their view on the current development of corporate engagement, which represents a new frontier in sustainable investing and an opportunity for wealth managers.

ESG funds have clearly become mainstream over the past several years – by the end of 2022, their total assets accounted for 22 percent of fund assets in Europe. Corporate engagement is emerging as the next driver of growth in sustainable investing.

This involves asset managers meeting with the senior management of investee companies to motivate them to make improvements on sustainability issues. This can range from operational improvements to addressing climate change issues in their corporate strategy.

Institutional asset managers with larger research analyst teams have historically spearheaded engagement. Now, an increasing number of smaller asset owners and managers are pursuing corporate engagement. This widens the scope of engagement and its impact on companies.

The Case for Engagement

Corporate engagement’s key benefits can address some of the most common criticisms of sustainable investing. First, critics often argue that excluding more challenging sectors such as mining or oil and gas can increase volatility and harm performance.

Through engagement, however, investors are able to tackle sustainability issues in these sectors without excluding investments in these sectors. Instead of shunning such companies, corporate engagement allows investors to confront the companies and encourage them to mitigate significant sustainability risks and improve their impact on society and the environment.

Second, the financial performance of sustainable investing is often questioned by private investors. However, some of the most compelling research in the area of sustainable investing shows, that companies that are improving their sustainability profiles over time outperform financially.

Stronger Performance

MSCI, for example, has demonstrated an annualized outperformance of the MSCI World Index stocks with stronger ESG momentum (top quintile) to the MSCI World Index stocks with weaker ESG momentum (bottom quintile) of 1.09 percent from 2009 to 2018.

This figure rises to 3.61 percent for companies of the MSCI Emerging Markets Index with stronger (top quintile) respectively weaker (bottom quintile) ESG momentum for the period from 2013 to 2018. Investors can benefit from this outperformance through engagement and focus on companies with the potential to improve.

Moreover, this opens the door to working with management to realize these improvements through an active dialogue. The rise of greenwashing allegations has led to questions over the impact of sustainable investment strategies.

Engagement cases, however, provide some of the clearest examples of the influence that investors can have on companies’ impacts on the environment and society. Clients of independent wealth managers can gain compelling, real-world insight into the role that sustainable investing plays in improving sustainability and performance by participating in engagement with companies to mitigate environmental, social and governance risks.

Widening the Scope of Investors

A common misconception is that such strategies require large stewardship teams given the time and effort required to spearhead successful engagement cases over time. Several developments are making engagement accessible to a much wider group of investors.

In response to the growing interest in engagement among investors, engagement services are now part of the offering of ESG research providers and several large asset managers. These services pool the assets of investors to engage on their behalf, which gives smaller investors the opportunity to benefit from much larger size and scale to drive change at the world’s largest companies.

Smaller investors such as independent wealth managers are able to access the insights from these engagements and to report the results to their clients. Collaboration has emerged as one of the most effective strategies to drive sustainability change at scale.

Achievable Targets For Companies

The best known of these initiatives is Climate Action 100+), a program that includes more than 700 investors representing over $70 trillion in assets under management. Climate Action 100+ engages the world’s largest and most impactful companies in addressing climate change, with several lead investors engaging with senior management of companies on behalf of the entire coalition.

The initiative has defined a clear set of ambitious but achievable targets for companies to mitigate climate risks and orient their business strategy toward a low-carbon economy. One successful engagement from Climate Action 100+ in Switzerland has been Holcim.

As the largest CO2-emitting company in the SMI, Holcim has taken significant steps to decarbonize its business model. In response to engagement requests, Holcim last year not only published a science-based target for emissions reductions by 2030 but also partnered with the Science-Based Target Initiative to define the standard for the cement industry more broadly.

Following the success of Climate Action 100+, other collaborative engagement initiatives have emerged to deal with issues ranging from biodiversity to human rights. Recently, the United National Principles for Responsible Investment launched the Advance collaborative engagement to address human rights issues.

Working Together

Initiatives such as these allow smaller asset owners, asset managers, and private banks to participate and benefit from the assets and resources of the entire coalition. Collaborative engagements not only provide opportunities for investors, but they have also proven to be efficient for companies.

Rather than needing to respond to different requests from various investors, collaborative engagements consolidate a diverse set of views in a single set of engagement goals. As a result, companies can focus on actions at the core of their sustainability issues.

By working together, investors are expanding the scope of those able to participate in corporate engagement. This has improved the effectiveness of engagement by incentivizing companies to mitigate sustainability risks, thereby increasing their favorable impacts.

This not only benefits external stakeholders but can also lead to improvements in the financial performance of both companies and investor portfolios. Corporate engagement thus represents a further maturing of sustainable investing by expanding the scope of investors involved and the impact that they can have when working together toward common objectives.

Markus Werner has been a member of the Executive Board of LGT Bank since 2011 and Head of Intermediary Business of the banks in Switzerland and Liechtenstein since 2018. He has been with LGT Bank since 1996 and is a Swiss-certified banking expert and certified as a finance and investment expert in Switzerland by AZEK.

Christopher Greenwald is Head of Sustainable Investing at LGT Bank (Switzerland) Ltd. Prior to that, he was Head of Sustainable Investment Research & Specialists at UBS Asset Management, Head of Sustainability Research at RobecoSAM, Head of ESG Content Strategy at Thomson Reuters and Director of Data Content at ASSET4. His academic credentials include a Ph.D. in Political Science from Duke University, an MBA from HEC Lausanne, and the FAME Certificate from the Swiss Finance Institute.