Investor engagement, as a private dialogue with companies on Environmental Social and Governance (ESG) risks, is a growing Sustainable and Responsible Investment (SRI) strategy in the financial markets. Institutional investors have become less silent in their external ESG risk management of companies in their investment portfolios. This study examines private ESG dialogues by Nordic institutional investors with global companies and their subsequent implications. The decision of institutional investors to engage with companies is associated with the financial risk inherent in ESG incidents.

In this paper, social movement theory and the theory of rational activism provide the theoretical underpinnings for social pressures and investors’ decisions to execute their voice by means of active engagement in the form of private dialogues in relation to ESG risks. Legitimacy theory explains the need for companies to respond to ESG activism of investors and regain their legitimacy in terms of risk management.

The aim of the study is to model the process of investor engagement, examine the characteristics of ESG engagements and the characteristics of companies that lead to activism and whether active engagements affect governance, sustainability reporting quality and financial performance of target companies. The areas of engagement are corruption, environment, human rights and labor rights. The study employs a proprietary database of 858 ESG engagements in a sample of MSCI World companies targeted by Nordic institutional investors since 2005.

Results show that engagements are driven primarily by ESG risks and not current financial underperformance. 29 % of target companies have adopted ESG changes at the end of period. Successful engagements receive good response and progress ratings by the professional engagement services. The engagement processes tend to take 10 subsequent dialogues and require 3.73 years of engagement duration. We find that companies targeted for activism tend to be larger, more profitable and have lower market value than the control group. Results confirm that ESG policy; performance and reporting quality improve after activism.