Ensuring Impact Through Investor Engagement: A Qualitative Study of How Asset Owners Can Ensure Positive Impact Through Engagements with their Asset Managers

Annie Barry & Sarah Maria Lykke Thomsen

Student thesis: Master thesis

Abstract

Impact investing is a relatively novel field and has over the last decade seen an increasing demand. However, uncertainties still exist as one unified definition of impact investing is not established and standards for reporting do not exist, leading investors to face difficulties in ensuring positive impact of their investments. This is especially a challenge for asset owners who invest through intermediaries such as external asset managers, limiting their contact with the asset. Asset owners must, therefore, rely on their engagement with their asset managers to ensure positive impact. Engaging to ensure impact is a relatively unresearched field, in which this thesis is positioned, aiming to examine how asset owners seeking positive impact of their investments can engage with their asset managers to ensure that the positive impact is achieved.
The research consists of a literature review, an empirical analysis, and a discussion comparing the academic and empirical findings. The empirical study consists of interviews with 22 practitioners within the field of impact investing, including asset owners, asset managers, and service providers. Based on agency and stewardship theory, the three factors influencing the choice of engagement, actors, expectations towards the asset manager, and situation, are analysed with the application of relevant frameworks. The analysis shows that the relationship between the asset owner and the asset manager is influenced by several factors external to the relation, including, a variety in how impact investing is understood and a lack of measurement standards. Thus, it is found that the relationship between asset owners and asset managers is not best analysed in isolation, and therefore the systemic structures of engagements within impact investing are analysed.
The results demonstrate a paradox of engagements, as the identified theoretical optimal relationship, being a mutual stewardship relationship, is not the best way for asset owners to engage with their asset managers to ensure positive impact. Several factors within the identified system such as the lack of standard definitions and transparent reporting will through time create a perception gap of how the asset owner and the asset manager understand impact. This leads to the mutual stewardship approach not being achievable and creates a risk of unintentional opportunistic behaviour by the asset manager leading to an agency problem. Thus, the best option, given the current system, is for the asset owner, to treat the relationship with the asset manager as a mutual agency relationship.
The study concludes, that given the current systemic structures, asset owners must engage with their asset managers to continually align the perceptions of impact investing in two stages; 1) initially in terms of due diligence and setting up intentions, incentives and align expectations with their asset manager, and 2) on an ongoing basis with the objective to keep perceptions aligned by pursuing dialogues and asking critical questions.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages147