annual review indst 2024 public - Flipbook - Side 14
EOS
Cumulative number of live and completed/
discontinued objectives
6,000
5,000
Other academics have explored the link between engagement
and the long-term performance outcomes of companies. To
isolate the effect of engagement on company performance, and
to unravel the drivers of the most effective type of engagement,
academics have considered how engaged companies have
fared, when compared with a similar group of companies that
have not been engaged on ESG topics by investors.
4,000
Does engagement manage risks?
3,000
2,000
1,000
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
14
Environmental
Social
Governance
Strategy, Risk & Communciation
Source: EOS data
A later iteration of the study concluded that beyond governance,
companies with good or improving social characteristics tend to
outperform their lower-ranked competitors. Additionally, during
down markets, companies with poor environmental performance
lag their peers in terms of value. Using the FHL global equities
team’s QESG score, which combines quantitative ESG
research from a range of data providers with engagement
insights from EOS, a 2019 study4 found that instruments from
issuers with higher ESG scores had narrower credit default
swap spreads, indicating a lower credit risk.
Does engagement work?
In line with these studies, a 2024 paper5 found that a higher
Thomson Reuters ESG score was positively associated with
better overall company performance, defined by the authors
using Tobin’s Q – a measure of the market’s assessment of a
company’s long-term expected value. The authors found that
this positive relationship was enhanced where a company
outlined the processes in place for engagement with its
stakeholders, which the authors used as a proxy for
stakeholder engagement taking place.
Another recently published study6 found that companies
engaged on climate risk are more likely to commit to
adopting science-based emissions reduction targets and
enhancing climate-related reporting. Additionally, targeted
companies reduce emissions by 7.5% a year in the two years
following the climate risk engagement, relative to other firms.
In an award-winning study conducted by Hoepner et al,7
which uses EOS data, the authors found that engagement on
ESG issues reduces companies’ downside risk. To disentangle
this relationship, the researchers compared a treatment group
of engaged companies with a control group of companies
comparable in key characteristics to the treatment group,
except that they had not been targeted by EOS.
Using EOS’s milestone system to track engagement progress,
the authors found that over a two-year timeframe, there was a
significant risk reduction effect where the company had
acknowledged the existence of an issue (milestone two).
Milestone three indicates that a company has committed to
taking action to resolve an issue. The findings suggest that the
risk reduction effect increases as engagement progresses from
milestone two to three. Where engagers have raised issues, but
the companies have not acknowledged them as such, risks
were not reduced, highlighting the potency of engagement.
Hoepner and his co-authors also found that engagements
around environmental topics, primarily climate change,
offered the largest potential for risk reduction. Taking this a
step further, the findings of the study indicated that firms
exposed to engagement experience an actual reduction in
exposure to risks from environmental incidents. The number
of incidents for those companies targeted by engagement
falls by 26% post-engagement.
Does engagement improve ESG
ratings performance?
While the Hoepner study explores the effectiveness of
engagement on risk reduction using EOS data, other research
has indicated similar results. For example, a 2021 research paper8
found that companies with low ESG ratings, on average improve
their scores after engagement. The ESG ratings of companies
with initially higher scores are reduced as engagement uncovers
hitherto unrevealed ESG risks. Following a successful
engagement, the authors found, sales growth increases on
average, and buy-and-hold stock returns are positive up to 12
months after the completion of an engagement.
What are the hallmarks of effective engagement?
4
Reinforcing EOS’s approach of prioritising personal meetings
with senior company executives and board members, the 2017
independent study Talk is not Cheap9 found that engagement
with chairs was the most important factor when seeking to
promote change at companies. The study further showed that,
on average, for each additional personal meeting, the chance
of progress in engagement increases by about 5%.
7 – pricing-esg-in-sovereign-credit-q3-2019.pdf.
JABES-08-2023-0306_proof 263..276.
6
Climate Risk Engagements by François Derrien, Alexandre Garel, Arthur Romec, Feng Zhou :: SSRN.
7
OP-ROFF230039 483..510.
8
Shareholder Engagement on Environmental, Social, and Governance Performance.
9
Hermes EOS – Research Report – Sep 17.
5
