ESG headlines emphasise backlash and retreat. Yet, focusing on short-term signals risks obscuring what is happening beneath the surface.
The risk is the industry may be overly focused on identifying failure, rather than recognising progress and the increasingly important role that active engagement plays in distinguishing rhetoric from substance.
Clients and advisers are asking more detailed questions and rightly testing assumptions more rigorously.
For example, net zero remains a priority topic across client conversations. However, the nature of the dialogue has evolved, with greater recognition that transition pathways are uneven.
Long-dated targets lack credibility if they are not paired with clear operational plans. In some cases, a company choosing not to set a formal net zero commitment because it lacks clarity on how to deliver it may be viewed as more credible than one announcing targets without a roadmap.
The focus, therefore, is whether ambition is matched by action. How is capital expenditure aligned with stated ambitions? Are interim milestones realistic? How does a company respond if it misses targets?
This scrutiny also raises a broader question about the role of investors. As discussions on ‘systemic’ engagement grow, there is a risk of us overstating where influence is most effective.
“Active engagement is critical. It enables investors to test credibility and resilience beyond what is disclosed in annual reports”
Some investors may opt for a systemic stewardship approach, but being clear about where impact is strongest – and how this differs across investment approaches – matters. For active investors, that influence is most direct at the company level through stock selection and direct dialogue with management teams.
In a more contested ESG environment, credibility depends not on the breadth of claims, but on the ability to influence and deliver performance for our clients.
Engagement in a quieter disclosure environment
There has been a change in corporate communication. In some markets, companies appear more cautious about how they publicly frame sustainability initiatives. Language is more restrained and disclosures may be less prominent, making assessment through public reporting alone more challenging.
In this context, active engagement is critical because it enables investors to test credibility and resilience beyond what is disclosed in annual reports.
We saw this with a large US bank, which has moderated aspects of its public positioning, including exiting certain net zero industry groups. Despite this, it continues to publish transition-related disclosures – including an energy supply financing ratio – and maintains climate risk oversight within its core risk framework.
While external communications in the organisation may have shifted, operational integration has continued. Engagement is essential to understand the nuance.
A positive view of action and progress
Heightened scrutiny means engagement cannot be passive or solely focused on identifying shortcomings. Progress on sustainability is rarely binary or linear.
This raises a challenge for the industry. ESG analysis has traditionally been framed through risk identification and mitigation. While essential, this can skew engagement towards highlighting shortcomings rather than reinforcing progress. If the balance tips too far towards pessimism, the value of positive incentives may be underestimated.
Investors have well established tools with which to penalise – votes against management, divestment, or public criticism. The mechanisms to reward credible improvement are less frequently used. Yet, recognising progress can build internal momentum within companies and support more durable change. We should challenge ourselves to do this more.
A more balanced approach does not mean lowering standards. It reflects the reality that constructive engagement can reinforce governance reforms, strengthen accountability and encourage continued advancement.
In 2023, we identified a gap in how certain apparel companies assessed climate-related physical risks to supply chain workers. Proprietary research conducted with an academic partner indicated that extreme heat and flooding could materially affect productivity and margins.
We initiated targeted engagement with several companies we held stakes in. Through approaching engagement as a collaboration, we identified existing good practice and encouraged further integration of climate adaptation planning with human rights due diligence.
This has led to tangible progress, including one international apparel brand committing to expanding its adaptation measures to address heat stress risks across key manufacturing regions and embedding worker protection within its climate strategy.
Another firm has since embedded Just Transition and worker resilience language into its sustainability communications and broadened its assessment of climate risks within its supply chain.
Where gaps remain, engagement continues. Our objective is to strengthen resilience while recognising and reinforcing the interim progress that underpins long-term outcomes. Short-term volatility does not remove long-term exposure to financially material risks.
Active engagement operates on a longer horizon and is essential to separate the backlash headlines from the incremental progress. It is measured in years rather than news cycles.
Viewed over that horizon, the trajectory remains positive.
Katie Frame is engagement lead at Schroders.
