At a time when ESG standards remain muddy in the U.S., investing in funds with issuers that are doing their due diligence can create better return potentials in the long term. Companies with ESG mandates could provide a lower risk profile as the SEC mulls ESG disclosure requirements and create greater shareholder value over time. Numerous studies have shown that when investors engage with companies on their environmental, social, and governance practices, shareholder value is created.
In a study done by the Principles for Responsible Investment back in 2018, PRI analyzed engagement both from the investor and corporate side for the first time and came to the conclusion that engagement dynamics fall into three broad categories: communicative dynamics, learnings dynamics, and political dynamics.
Communicative dynamics allows for information to be exchanged between both investors and companies and creates “communicative value” for both. Through this exchange of information, both sides gain a better understanding of expectations and the roadmaps to meet goals, as well as set ESG expectations from an investor side.
“A strong consensus emerged among all corporate interviewees that ESG engagement offers a unique opportunity to understand and clarify investor ESG expectations. This helps them to adjust and enhance their external ESG transparency and communication to investors,” wrote the authors of the study.
Learning dynamics allows for the gathering and passing on of new information, whether it applies to new ESG trends, a better understanding of ESG issues, or identifying and working to implement industry best practices. The dialogue allows for investors to contextualize their investment choices, while on the corporate side it means benchmarking and finding the gaps in current practices.
Political dynamics center around building the long-term relationships between investors and companies and include things like elevating practices, resources, and personnel within a company that will address ESG specifically.
“In particular, we found that ESG engagement facilitates the development of stronger relationships, and enhanced coordination, between ESG departments, investor relations and/or the finance function within companies. Consequently, engagement can help close the ‘sustainability-investment gap’ often found between corporate sustainability and financial experts,” wrote the authors.
Investing in an Issuer Practicing Engagement With IndexIQ
IndexIQ Advisors, a subsidiary of New York Life Insurance Company, is a signatory of the PRI since 2019, and has an extensive engagement policy that allows for flexibility across strategies and subadvisors. Engagement practices include direct engagement with companies, issuers, and stakeholders; engaging at an industry level and with policymakers via trade association participation; and collaborating with the broader industry on issues.
Topics that IndexIQ works to address with companies include increasing their transparency and creating better ESG disclosures, corporate governance that extends to board structures as well as executive compensations, climate impact reporting and practices, human and labor rights, promoting DEI (diversity, equity, and inclusion), and identifying ESG risks and opportunities.
“If an engagement practice is utilized and initial engagement efforts are unsuccessful, various escalation methods may be employed to reengage with portfolio companies to accomplish their objectives. Due to the wide range of investment strategies offered by IndexIQ, escalation methods may vary,” Index IQ wrote in its engagement policy guide. These include placing a company on a watch list, collaborative engagement with other issuers, utilizing voting rights against management, and divestment.
IndexIQ offers four different dual impact funds that provide exposure along different strategies while also contributing a portion of their management fees to organizations improving climate and human health. These funds include the IQ Cleaner Transport ETF (CLNR), the IQ Clean Oceans ETF (OCEN), the IQ Healthy Hearts ETF (HART), and the IQ Engender Equality ETF (EQUL).
For more news, information, and strategy, visit the Dual Impact Channel.