When environmental, social, and governance (ESG) investors consider their options for advocating for progress toward long-term goals, they tend to focus on filing shareholder proposals or pursuing other means of corporate engagement.
Yet a growing number of investors are also seeking to drive positive change through public policy engagement. In its 2020 Annual Report, the UN-supported Principles for Responsible Investment (PRI) indicated that for the first time, more than half (51%) of reporting signatories said they engaged with policy makers.
Why Public Policy?
Advocates for investor involvement in public policy, such as the Forum for Sustainable and Responsible Investing (US SIF), argue that laws and regulations not only dictate many issues of critical interest to investors but also shape the landscape in which impact investment occurs—as well as the stability of financial markets more broadly. “Public policy sets the rules of the game,” in the words of a separate PRI report on investor engagement in public policy. With that in mind, some consider public policy engagement to be a vital aspect of investors’ purview and responsibility.
Public policy engagement differs in important ways from corporate shareholder advocacy strategies. For instance, policy engagement tends to involve longer time frames. As the PRI report on policy engagement points out, it took the Securities and Exchange Commission (SEC) seven years to implement the binding guidance on climate change disclosure requested by investors. In addition, investors generally become involved in policy engagement later than they do when they engage with companies because policy work involves many more stakeholders, including nonprofits and trade unions.
Both types of engagement have their advantages and disadvantages for ESG investors. Public policy engagement can help investors address systemic risks that may affect long-term value creation. For example, it could contribute to the creation of legally enforceable ESG disclosure standards. At the same time, the process of policy making is highly complex and requires technical expertise that investors might lack.
On the other hand, corporate engagement can enable productive discussions about sensitive issues and build a sense of urgency, as companies must respond within a specific time frame. That said, direct discussions with companies lack a formal obligation for businesses to meet with investors, and shareholder resolutions are typically nonbinding.
How Investors Can Engage in Public Policy
Investors can engage in public policy in a variety of ways. As sustainability advocacy nonprofit Ceres outlined in a 2019 guide to investor influence strategies, investors can draft position statements and letters, hold meetings with legislators, or contribute research and insights. To strengthen their influence, they can encourage investor organizations to band together and advocate for policies collectively. Less directly, they can also engage companies on their public policy positions.
Incorporating several of these strategies, US SIF has participated in public policy engagement on a range of issues, from the three pillars of ESG to financial reform and access to sustainable investing. For example, it signed a 2020 joint comment letter on proposed amendments to SEC key shareholder proposal rules and issued a statement opposing the Trump administration’s decision to withdraw from the Paris Agreement in 2017.
One recent example of the influence investors can have over public policy took place in spring 2020, when the US Department of Labor (DOL) proposed restrictions on the use of ESG investments in retirement plans governed by the Employee Retirement Income Security Act. After the DOL was flooded with more than 1,100 original letters and 7,000 signed form letters from investors and others during a 30-day comment period, the department made deliberate changes to the language of the final rule, announced in October, to avoid explicitly discouraging ESG strategies. While some investor groups, including US SIF and Ceres, remain unhappy with the outcome, they are unlikely to stop engaging policy makers as the presidential administration changes hands.