Institutional Investor ESG Engagement: The European Experience

Abstract

Awareness of the systemic challenges posed by environmental and social issues has driven regulatory action undertaken at the EU level more strongly by far than in any other jurisdiction. Some pieces of regulation adopted under the umbrella of the so-called European Green Deal rely on institutional investors to drive a shift towards sustainable finance. But in spite of the growing practical relevance of active share ownership, including in its environmental and social dimensions, whether institutions are motivated, and are actually able, to effectively play such crucial a role remains controversial. Even assuming they were committed to not just cosmetically address environmental and social issues, still there are limitations to the reasonable reach of investor action in face of the scale of the challenges at stake. Limitations not only derive from the deficient incentives structure and the collective action issues that are typical of asset managers. They also depend on factors not in control of the asset manager, such as varying end-investor preferences and availability of better ESG data and information. The problem of divergent, and opaque, ESG ratings and indices couples with that of non-consistent frameworks for corporate sustainability disclosures, and the underlying differing concepts of materiality, making it hard for investors to resort to reliable yet essential information they need to properly perform sustainability assessments. Some skepticism concerning institutions’ disposition to sustainability seems to be justified also where evidence referring to their actual voting behavior at investee firms is considered.