INSIGHT by Camila Yamahaki, senior researcher in Sustainable Finance at the Center for Sustainability Studies at Fundação Getulio Vargas (FGV) and Catherine Marchewitz, senior researcher in Sustainable Finance in the Climate Policy Department at the German Institute for Economic Research (DIW Berlin).

In our recent study we identify a trend that investors engage with sovereigns to fulfill their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments.

Camila Yamahaki | © Oscar Xavier de Freitas

Institutional investor engagement with companies on ESG issues increased substantially throughout the 2010s. According to the 2020 Global Sustainable Investment Review, which maps the state of sustainable investment of major financial markets, total assets under management employing engagement strategies grew from US$ 8.4 trillion in 2016 to US$ 10.5 trillion in 2020. Using their ownership position to influence corporate policy and practice, investors are engaging with companies through shareholder resolutions, voting, face-to-face meetings, and lawsuits.

Adding to this, a new phenomenon has risen on the engagement horizon.

Catherine Marchewitz | © DIW Berlin

Besides engaging with corporations, there are an increasing number of asset managers engaging with policymakers, governments and government-related institutions (see, for example, Colchester Global Investors; Pictet Asset Management; Robeco) as well as investor associations and collaborative initiatives targeting government officials to change public policy, such as the Investors Policy Dialogue on Deforestation (IPDD), Shareholders for Change (SfC), The Investor Agenda, the Emerging Markets Investors Alliance (EMIA), the Seventh Generation Interfaith Coalition for Responsible Investing, and the Interfaith Center on Corporate Responsibility (ICCR).

These initiatives may indicate that investors find it insufficient to engage only with companies to improve investment value, but the reasons are still unclear. As such, the importance of public policy has increased for investors since 2015, when governments committed to shift trillions of dollars to be consistent to the goals of the Paris Agreement and to increase investments in the Sustainable Development Goals (SDGs). Further, investors have accepted the influence of ESG factors on delivering financial returns, recognizing the need for well-designed and effectively implemented public policies to support national economic and sustainability objectives as well as to increase the attractiveness of countries as investment destination.

Yet, theory lags behind practice – little academic research exists so far, analyzing what drives institutional investors to engage with government entities. Hence, our study seeks to answer this question.


| Sovereign engagement by investors: insights on the why

We understand investor engagement in public policy as developing relations with governments and policymakers with the explicit aim of influencing public policies and practices, either directly or through third parties, working groups or collaborative initiatives. In our paper we analyzed 11 case studies of investor engagement with policymakers from Australia, Brazil, the EU, Indonesia, Japan, Namibia, amongst others, looking for investor motivations as to why they engage with policymakers. We relied on secondary data, analyzing reports on the engagement initiatives, reports from investor associations, web sites of investors and investor coalitions, investor engagement policies, investor letters to sovereign entities, among others. We are currently interviewing investors to complement data collection.

From the case studies, firstly, we found that investors engage in public policy to comply with their fiduciary duty and act in the best long-term interests of their beneficiaries. Since the rules that govern the financial system and investee companies are not always aligned with the best interest of beneficiaries, investors believe they have a duty to engage with policymakers to change some of these rules to be more aligned with the financial interests of their beneficiaries.

Second, investors engage with sovereigns to manage investment risks from their portfolios. Having regulations that require investee companies to report on ESG issues in a comprehensive, periodic, and comparable manner helps investors to monitor and manage the ESG risks of their own portfolios. Moreover, having enforced regulations requiring companies to properly manage material ESG risks (e.g., climate risks) improves investee companies’ management, avoids the need for investors to engage with individual companies on the same ESG issues, and protects investor portfolio value. Investors are also concerned about mitigating systemic risks that might influence the economy as a whole, such as climate change and human rights issues, thereby affecting the beta performance of their portfolios.

From a sovereign investment perspective, sovereign bond investors are encouraged to engage with policymakers to reduce reputational, operational, and regulatory risks that arise from failing to address ESG issues that have the capacity to affect the valuation of the sovereign bonds of these countries.

Third, investors are engaging with policymakers to create enabling conditions for investments in companies with good ESG performance. If externalities are not required by the rule of law to be internalized, then ESG laggards have a competitive advantage in comparison to proactive companies that have incurred in costs, whether, for example, to reduce their GHG emissions or to combat human rights violations. By acting as such without the right conditions and incentives, these ESG-leading companies tend to compromise their financial returns and those of their investors. On the other hand, the enactment and enforcement of public policies that require companies to internalize externalities contribute to levelling the playing field for all businesses and to creating more rewarding conditions for leading companies and their investors; which Eurosif claims works “by making harmful investments more expensive and sustainable investments more competitive.” Additionally, it favors the appearance of new investment opportunities that would be otherwise not financially viable.


| Future research

As noted earlier, we are currently interviewing investors involved in these engagement initiatives to further investigate the drivers of policy engagement as well as identify the challenges that investors encounter in this type of engagement. We will present the final research findings at the 2023 PRI in Person, in Tokyo.

Research shows that investors started engaging in order to change the rules of the game. Evidence will show if they can play a constructive and effective role in policy debates on sustainability issues.


| about

Camila Yamahaki is a senior researcher in Sustainable Finance at the Center for Sustainability Studies at Fundação Getulio Vargas (FGV). She has a bachelor’s degree in Public Administration from FGV; an MA in Corporate Social Responsibility from The University of Nottingham; an MSc in Research Methods and a PhD in Business and Management from Middlesex University. She also has the CFA Certificate in ESG Investing. Before joining FGV, Camila has worked at Trench, Rossi & Watanabe, SESI, AccountAbility, UKSIF and the UN-supported Principles for Responsible Investment. Her PhD thesis analyzed the determinants of shareholder engagement in Brazil and South Africa.

Catherine Marchewitz is a senior researcher in Sustainable Finance in the Climate Policy Department at the German Institute for Economic Research (DIW Berlin). She studied social sciences and business administration at the University of Mannheim and the EM Strasbourg Business School and completed a doctorate in political science at the TU Darmstadt. Her thesis examined NGOs using shareholder engagement to improve Corporate Social Responsibility. Before joining DIW Berlin, Catherine was leading teams in marketing and corporate communications for investment, asset management and management companies and worked as a consultant for the financial industry.


All opinions expressed are those of the author and/or quoted sources. is an independent and neutral platform dedicated to generating debate around ESG investing topics.