Engagement associated with fall in emissions intensity but not absolute emissions, study shows

Successful engagements with companies on material issues are associated with a 2.5 percent outperformance over 14 months, but engagements on environmental issues are not associated with a reduction in absolute emissions, according to a new paper by academics at the University of Maastricht.

The paper, co-authored by Rob Bauer, Jeroen Derwall and Colin Tissen, studied a set of around 7,500 engagements carried out by Columbia Threadneedle UK – formerly BMO GAM’s EMEA wing – both on behalf of its own assets and by its responsible engagement overlay stewardship service.

The academics find that the materiality of engagement topics is key. Engagements on financially material topics covered by the SASB standards are more likely to succeed, with material engagements on governance topics 10 percentage points more likely to see success.

Furthermore, successful engagements with companies on material topics, which made up 75 percent of the sample, are associated with a cumulative excess return of 2.54 percent against sector peers over the 14 months following the engagement, which the authors said is the average time taken to reach a milestone.

The paper found that firms targeted for environmental engagement are often carbon laggards, emitting 31.3 percent more in absolute terms and with a 29.4 percent higher intensity than their peers. The average decrease in emissions intensity following an environmental engagement is 24.6 percent, although the study found no change in absolute emissions levels.

The overall success rate for engagements remained relatively low, however, with material engagements succeeding in 21.5 percent of cases and immaterial engagements succeeding in 15.1 percent. Other factors which improved the success rate were repeated contacts with the target – just 1.45 percent of engagements with only one contact succeeded – and engaging alongside other investors.

Engagements with companies in the extractives and healthcare sectors were most likely to lead to success, although the authors warn that engagement with extractives firms often concern disclosure or target-setting rather than actual performance changes.

While the paper found an association between successful engagements and positive returns, Colin Tissen cautioned that the researchers were not claiming a causal link, and that it was difficult to draw causal conclusions on the effects of investor stewardship on company behaviour, especially when using data from only one manager.

“One of the points we are trying to make in our paper is that standardised sustainability reporting frameworks, such as the SASB standards, can be used to improve client reporting on engagements,” he said. “It allows for directly tracking all engagement activities and their outcomes (milestones), which makes it easier to assess the impact of engagements on target firms quantitatively. More collaboration between academia and asset managers can, therefore, improve the effectiveness of engagement.”

The paper, which has not yet been published, covers engagement data from 2007-2020.