“Speak softly and carry a big stick” once described how the United States approached foreign policy. For US institutional investors, the phrase could be updated to “when you carry a big stick, you can speak up”. This is because recent CoreData research shows the more influence investors have on an issue, the more likely they are to engage with companies about it.
Findings in our report, Institutional Investors & Shareholder Activism in the USA, demonstrated the positive relationship between the influence held by investors and their propensity to engage with companies. Put simply, investors are more likely to engage with companies on topics where they feel they are somewhat or very influential. This makes sense intuitively and the data confirms it in practice. The relationship is not perfectly linear, but we can see that investors are more likely to engage on topics such as environmental protection, renewable energy and clean technology, where around 70% of investors see themselves as being influential. Around 40% of investors engage with companies on these topics, and around half of these investors say that they always or often engage on them.
On the other hand, investors are much less likely to engage with companies on topics where they have less influence, such as tobacco, gambling and alcohol. Here, less than half of investors see themselves as being influential and less than a quarter engage to any extent. Here, investors presumably realize that there is little value in engaging with companies involved in the so-called ‘sin stocks’. Engagement will not change the fundamentals, so investors must decide if they are in or out when it comes to investing in these sectors.
In contrast, institutional investors will engage with companies on many other issues, in the hope of positively influencing a company’s approach. And as we find that US investors expect shareholder activism to become more important in the future, we can expect to see engagement levels rise over time, strengthening the relationship between engagement and influence.
Another observation is that US institutional investors are engaging on a wide range of issues across the ESG agenda. Research from CoreData and other sources has shown that institutional investors in the US lag their counterparts in Europe and elsewhere in adopting ESG investing, but this does not mean that all US investors are ESG sceptics. Events in 2020, such as the Black Lives Matter movement, are likely to lead to greater scrutiny of the S in ESG, or social topics. Indeed, social issues are already a focus for many US investors, who may use positive discrimination to support minority-owned fund manager businesses in a way that European investors do not.
Another point here is that we might be at a turning point for US institutional investors and ESG. In one of his first acts, President Biden has committed the US to rejoin the Paris climate agreement. His determination to tackle climate change means it is all but certain he will take steps to use the power of the markets to push for environmental action. As a result, US institutional investors may start to catch up with their peers in other regions in the value placed on the environmental aspects of ESG investing. And as shown here, some environmental topics, such as environmental protection, are already firmly on the radar for US investors. On other topics, such as energy and climate, where more than two-thirds of US investors believe that they are somewhat or very influential, engagement must be likely to increase.
So as investors exert their influence, they will seek to engage more with investee companies. For asset managers with US institutional investor clients, the implications are clear. Managers need to be ready to work alongside investors, to help them become more active shareholders, intent on speaking up and engaging with companies on a range of issues.