Coalitions Can Help Institutional Investors Improve Their Climate Impact

When a firm loses money because of climate change, so does its investors. New research shows how investors can lower climate risk and improve impact.

Climate change is a risk for investors because it impacts the companies in which they invest. Climate change poses both physical risk, such as storm damage to facilities and equipment, and regulatory risk, like the trend towards government-mandated carbon disclosure.

Investors can lower their impact by pushing publicly traded companies to lower greenhouse gas emissions, adapt to climate change, and report on their carbon emissions.

Investors wanting to drive climate action should consider forming a coalition with other investors. That’s because size matters when investors approach a target company’s leadership team. The more money you or your coalition manage, the more important you will appear to leaders at the target company.

Corporate leaders might not give you the time of day if you’re an individual with $1 million. But an institutional investor, like Sunlife Financial, controls nearly $1.5 trillion of other people’s money and will have more perceived legitimacy. Similarly, if 10 institutional investors form a coalition that controls $10 trillion in assets, they would become awfully hard for an investment-seeking company to ignore.

New Research On Best Practices for Shareholder Coalitions

The Principles for Responsible Investment (PRI), sponsored by the United Nations, recognizes the power of investor coalitions – they asked us to research the question: “Which factors make investor coalitions more successful in driving climate action?” The research team also included Rieneke Slager (University of Groningen), Santi Furnari (Bayes Business School), and Mikael Homanen (formerly at PRI).

Together, we studied 553 coalition engagements from 2008 to 2019, where the target companies spanned 35 countries. We also interviewed 88 investors, target firm staff, and PRI staff. This article summarizes what we learned.

If you work for an institutional investor and you’re worried about the impact climate change will have on your work, keep reading. You’ll learn how to get involved in a climate-focused coalition and which factors will make your coalition more successful.

Which Company to Target

Many institutional investors work with an ESG data provider to assess climate risk in their portfolio. This can help identify holdings in companies with high emissions or low-quality carbon disclosure.  These poor performers might be good targets for engagement, although not all companies will be open to change.

As you figure out exactly which company to target, consider how receptive each company might be to your request. Receptivity is usually a function of the firm’s willingness to change and its capability for change. 

You can get clues about willingness to change by looking at data on the company’s past environmental performance. If it has a track record good performance, the chances are better that your climate request will align with the company’s existing culture and be an easier ‘yes.’ Capacity for change refers the company’s ability to resource the change you’re requesting. Larger companies, with higher profits, will have an easier time finding the resources to support your request.

But that’s not to say there’s no value in engaging less receptive target firms, such as fossil fuel companies with an unimpressive record of climate action. Often, unreceptive companies contribute heavily to climate change and climate risk and are the least likely to change on their own. Your success rate here may be lower, but the victories are more important.

How to Start a Shareholder Coalition

Once you’ve decided on a target company, and you’re ready to start a coalition, there are a few options for getting started.

1. Talk to investors you already know. Ask if they are interested in engaging the target company collectively.

2. Look through lists of major shareholders at the target company. Get in touch with those investors.

3. Reach out to a convening organization, like PRI, who can help you build a coalition. Research shows there can benefits to working with an intermediary organization to build and coordinate a coalition. PRI has a collaboration platform investors can use to post a proposed collaborative engagement. Other organizations offer similar support, including Climate Action100+, Ceres, ShareAction, Australasian Centre for Corporate Responsibility, Interfaith Center on Corporate Responsibility, and many more.

How to Structure a Shareholder Coalition

Coalition Attributes That Make Companies More Likely to Listen

A coalition can include anywhere from two to 20+ institutional investors from anywhere in the world. The coalition usually nominates one or two of its member organizations to lead the process of engaging with the target company. Other members may participate in a lighter touch way.

Our review of the existing research shows that there are four coalition attributes that help make engagements more successful on average: size, local representation, experience, and shares held in the company. Below is more detail on each.

Bigger is Better

The size of your coalition is usually viewed as the most important factor in success. The more money your coalition controls, the more likely it is that a company will take your requests seriously. For instance, companies will take more notice of a coalition with $1 trillion in assets compared to another with only $2-3 billion.

If you can’t pull together a team with that many assets, however, don’t worry. It’s not absolutely required. You can use the other attributes below to make your coalition more compelling.

Include Local Representation

Often, having at least one lead organization from the same country as the target company’s headquarters can be useful. It will ensure that coalition members share the same language and cultural norms as staff at the target company, making communication more effective. In Japan, for example, there are strong norms around hierarchy and respectful behaviour. Someone socialized in a Western country may not be familiar with these norms, and unintentionally offend target company staff.

Have Experienced Members

Once the lead organizations are selected, they nominate their staff to participate in an engagement team. It’s particularly important for the lead engagers to include senior, experienced people (though senior members can certainly mentor junior staff). That experience should include:

• Technical expertise: If the coalition is asking an oil company to expand renewable energy production, for example, the engagement team should ideally include someone with technical expertise in both oil and renewables.

• Shareholder engagement experience: Navigating a target company is tough. Investors must figure out who to talk to and what to say in different contexts – skills that come with practice. Coalitions should include people with past shareholder engagement experience.

• Seniority: If the coalition is talking to the target company’s CEO or the board of directors, sending someone with the credibility to negotiate with senior leaders can boost receptivity.

Have a Stake in the Target Company

Another factor that can tilt coalitions towards success is the shareholding stake coalition members have in the target company. Do members hold a large percentage of the company’s total stock? If so, leaders at the target company may see your coalition as a more important stakeholder.

You May Not Need All Four Attributes

If you’re engaging a firm that won’t be receptive to change, it’s best to ensure your coalition has as many of the attributes above as possible. Our research shows, however, that you don’t always need that level of perfection. If the target company is profitable and has a strong environmental track record, it won’t be as hard to motivate them to make climate-friendly changes. In these cases, having a large coalition is important, but it’s still possible to be convincing if your coalition is missing either local representation or experience.

This nuance makes shareholder engagement more accessible for many investors. For example, imagine if your target firm is in Japan, but you don’t have a relationship with any Japanese investors.  That would make it harder to have local representation. But if the target firm is receptive, you can probably work with the experienced European investors you already know to effectively make the case for change.

Ground Your Requests in the Target Company’s Context

Once your coalition has the right members in place, you’ve got a solid foundation. But how you engage with the target company is also critical.

To convince a target company to tackle climate challenges, investor coalitions must first understand how the company works. Then, they can then make requests that are feasible within the company’s financial, operational, political, and cultural context.

For example, if the coalition wants a company to adopt a new emissions reduction technology, they could start by reaching out to the company’s investor relations department.  Investor relations might share insights on how the company is governed, and refer them to the Chief Technology Officer (CTO). Conversations with the CTO might reveal how technology decisions are made, barriers to change, and which technologies could be feasible, or even beneficial to the company.  From there, the coalition or the CTO (encouraged by the coalition) could pitch a feasible technology solution to the board, maybe even pointing to a relevant government grant that would cover some of the cost. If the board agrees, the company could find a consultancy to help with implementation.

Getting to know the company, and pitching a well-researched, feasible idea will make your request an easier ‘yes’ than approaching the board directly with an unvetted idea.

Shareholder Engagement Benefits Investors

When institutional investors form coalitions and work with companies to advance climate action, there are many benefits.

Hopefully, the target company will take the recommended action, which can lower risk for investors. Often, this is also a win for the target company, whose climate impacts will also be reduced. Company leaders may have been unaware of their vulnerability to climate change or of how to address these risks effectively.

Success is far from guaranteed, but if the target company refuses to take action, all is not lost. The engagement process itself gives investors deeper knowledge of the company and the ability to divest if the risk is too high. It may also give investors the confidence and legitimacy needed for more radical action, such as lobbying policy makers to advance change through regulation.