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Does ‘engagement’ improve companies and returns?

Very interesting ‘real life’ study out 'Does Paying Passive Managers to Engage Improve ESG Performance?', a 66-page working paper summarized here by Harvard Law School, looking at the impact of engagement activities (shareholder advocacy, etc.) on company ESG scores and subsequent performance – does engagement work? The authors, professors from Japan’s Waseda University, LBS and Brussels School of Economics, working with data from a ‘natural experiment’ of responsible investment by the Japanese Government Pension Investment Fund (GPIF).

They find that, indeed, engagement does improve company ESG scores and performance, though particularly when combined with other incentives.

For this ‘natural experiment’ in 2018, GPIF changed their mandate with its largest index asset manager, adding a requirement that the manager ‘improve the overall market through stewardship activities’. Simultaneously, GPIF changed the manager’s performance benchmark to new ESG indices that contain companies with improving ESG scores:

These indices theoretically ‘reward’ companies with improving ESG scores through ‘index inclusion resulting in additional equity investment through portfolio tilting’ – that is, more index tracking investors buy their company stock, potentially lowering their cost of capital – a good thing for a company.

The authors used company engagement data from the manager, comparing the ‘difference in ESG scores between companies that were engaged (the treatment group) with companies that were never engaged by GPIF’s asset manager (the control group) before and after the beginning of the engagement programme’. They then looked at index inclusion, weight and the stock price change for these two groups of companies subsequent to engagement efforts.

While the authors did find a difference in results based on the index, outcomes from analysis of MSCI index holdings showed NO impact from company engagement, while impact on FTSE holdings showed ESG scores for companies that were engaged ‘increased significantly relative to companies not engaged’. Through further analysis, the authors show that this difference is likely due to methodological differences between the two indices, with the MSCI indices essentially reducing the weight of companies in the index as their scores improved. Adjusting for this, overall they found that companies that had improving ESG scores showed a 2% return improvement, versus a 2% return reduction for companies that were excluded from the index.

It pays to engage

So, the authors conclude in general that ‘…engagement can have a measurable impact on published ESG scores…’ further qualifying that: ‘This effect was likely aided by combining remunerated engagements with financial and reputation incentives provided by best-in-class index inclusion’. 


There are very good details within the full paper on GPIF’s approach and process for company engagement starting on page 14, and a significant portion of the paper is dedicated to the necessarily complex analysis methodology applied to achieve their observations.

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