There is growing attention to how companies engage with environmental, social and governance issues (ESG).  At the same time, institutional investors, such as pension funds, increasingly engage in dialogue with companies on these issues, but it has not been clear how such engagements can add value for both parties.

We conducted a research project to ask how and why ESG engagement can create value, conducting 36 interviews with 52 corporate actors in charge of managing the dialogue with investors on ESG issues. Our study was supported by the United Nations-backed organisation the Principles of Responsible Investment (PRI), and summarised in a report entitled ‘How ESG engagement creates value for investors and companies’, which contains key recommendations for companies and investors.

Our report found that the value of ESG engagements that accrue to companies and investors can run through three broad channels. First, communicative value is generated through an exchange of strategically important information between investors and companies. Secondly, learning occurs through the diffusion of new ESG knowledge amongst companies and investors. Finally, there are political benefits of ESG engagements for both investors and companies through better collaboration between internal and external stakeholders.

Important differences emerged in how corporate and institutional investors perceived success. Companies viewed success as responding to investor queries, influencing investor perception through ESG engagements, and positive feedback and word of mouth from investors. On the other hand, investors viewed success in their roles as stewards of corporate ESG engagements, and in leveraging the ESG engagement to further their financial interests.

Our research highlighted that creating value through ESG engagements is a complex process, and third-party independent organisations, such as the PRI, can play an important role in facilitating the success of such engagements. Our key recommendations for companies are to enhance communication with investors, increase learning opportunities, and maximise internal coordination before meeting with external investors. For investors, we recommend making clear engagement objectives and expectations, strengthening engagement and feedback, and working together with clients and their beneficiaries.

Along with myself, co-authors were Jean-Pascal Gond of the University of London, Michael Viehs of Hermes Investment Management, Niamh O’Sullivan of Nottingham University Business School, and Szilvia Mosony of Cass Business School. You can read the report online here.