Emerging ESG-Driven Models of Shareholder Collaborative Engagement

The received view of shareholder engagement from a micro perspective holds that the difficulties of collective action and the resultant rational apathy on the part of shareholders discourage effective (collaborative) engagement. In theory, recent fundamental transitions in ownership structures – in particular, the increasing concentration of investment capital within active and passive funds – should not alter shareholders’ rational incentives to remain passive, particularly because funds compete with each other in offering the lowest fees, and any engagement at the level of a single portfolio company entails increased costs. Free rider problems also contribute to shareholder passivity. In practice, however, shareholder involvement has increased in recent years in spite of these disincentives. This development is attributed to four main factors: (i) the “Big Three” of the investment fund industry are often too big to remain passive, (ii) institutional investors increasingly use proxy advisors, (iii) political pressure and stewardship considerations spur on proactive shareholder involvement, and (iv) institutional investors, in particular hedge funds, collaborate with each other (“wolf pack” activism) or institutional investors follow the lead of activist hedge funds. The emergence of ESG investing has the potential to be a game changer. Increasing demand for ESG-compliant investments from millennials, the potential reduction of systemic risk across portfolios, and the opportunities for higher fees – at least during the transition period – constitute incentives for (formerly passive) institutional investors to adopt an active engagement approach, in particular by way of collaboration. We look at new forms of collaboration which are currently emerging: (i) among the Big Three, (ii) between hedge and impact funds (wolf pack activism?), (iii) between non-activist institutional investors and (iv) on new institutionalized platforms (Climate Action 100+; PRI). We explore potential legal risks associated with and obstacles to these (new) forms of collaboration (acting in concert, insider trading rules, antitrust law) and suggest ways of bolstering opportunities for future collaboration.