Investment managers must prioritise engagement and policy advocacy to address systemic risks

LCP’s seventh Responsible Investment (RI) survey of managers, launched today, shows that while investment managers initiate some engagement with companies, policymakers and regulators, execution falls short. 

Effective engagement is important to address company-specific risks and tackle systemic risks like climate change that affect the wider economy. Changing rules and incentives are key to influencing the entire system.

LCP experts found that managers need more structure in their engagement processes with companies – only 48% of managers set clear objectives for their engagements, and around half (51%) track progress or record outcomes. This lack of clarity can reduce the effectiveness of escalation policies, which provide a framework of actions based on triggers and with timescales for when engagement efforts are not working. Without proper monitoring, it becomes difficult for investment managers to determine when escalation is needed. LCP noted that only 65% of managers have escalation policies, and only 60% of these policies include timelines or triggers for escalation.

LCP’s survey also shows that most managers focus on promoting change in individual companies rather than seeking change across the whole market. Only 19% of managers indicated being more focused on seeking change across the whole market. This may explain why engagement with policymakers and regulators is often sporadic, with just 16% engaging frequently and 30% occasionally on market/industry-wide topics and systemic risks.

LCP looked at how managers engage with policymakers and regulators, noting that many take more passive and less direct forms, like thought pieces (51%) over writing letters to policymakers (37%). Alongside this, less than 6% of managers frequently engage on sustainable finance and real economic policies that are more focused on real-world impact as part of their policy advocacy.

Another crucial aspect of policy advocacy work is the alignment of a manager’s policy positions with those of the trade associations it belongs to. LCP found that 21% of managers do not review the consistency of the policy positions of their trade associations with their own policy positions, even on an ad hoc basis.

Sapna Patel, Principal at LCP and Lead Author, said: “Engaging with companies, policymakers, and regulators is essential for addressing climate change, nature loss and inequality. However, this requires proper accountability. Setting clear objectives and milestones is a critical first step, yet it’s something that many managers overlook. We encourage investment managers to re-evaluate their current engagement strategies to make them as effective as possible – and to be more focused on systemic risks.”

Claire Jones, Partner and Head of Responsible Investment at LCP, commented, “Focusing on individual companies and engaging with them is important, but the investment industry must take a broader approach to tackle market-wide challenges. 

“For example, we need faster action on net zero plans and real-world implementation, and we urge investors to engage more with policymakers and regulators on these issues.”