From influence to creation: How engagement in alternatives is a game-changer 

In our last article, Sustainable investing has grown up: are your portfolios keeping pace?, we explored the exciting expansion of the sustainable investment universe beyond equities. This diversification is crucial for building resilient client portfolios, but one of its most powerful—and often overlooked—advantages lies in a concept we thought we knew well: engagement. 

For decades, engagement in sustainable investing has been synonymous with equities. We think of shareholder resolutions, voting at AGMs, and heated meetings with company management to drive change. While these remain vital tools for influencing public companies, they are only part of the story. In the growing world of alternative assets, engagement takes on a new, more direct form, moving from a tool of influence to one of creation and verification. 

Shaping markets 

The labelled bond market (green, social, and impact bonds) is a perfect example. Here, investors engage well before a single penny is invested, and their involvement can be profoundly impactful: 

• Driving issuance. When engaged investors communicate their needs to potential issuers, it signals what the market is looking for. This dialogue actively encourages issuers to structure new bonds and bring them to market, directly growing the pool of investable opportunities for everyone. 

• Defining eligible projects. Through engagement, investors can influence the very DNA of a bond by providing feedback on the list of eligible projects, ensuring capital is channelled towards schemes with the highest integrity and impact. 

• Strengthening covenants. Critically, successful engagement can shape a bond’s covenants. Investors can insist on robust requirements for data to verify real-world impacts and set penalties for missed targets, building accountability into the fabric of the instrument itself. 

This proactive involvement means we are not just passive buyers but active participants in creating and improving the instruments the market needs. 

Verifying impacts 

The same principle applies to real assets like property and infrastructure. It’s one thing to invest in a fund that renovates buildings to be more energy-efficient; it’s another to verify that the promised improvements have been delivered. 

Engagement is the mechanism that makes this possible. It requires an open and ongoing dialogue with the company or asset manager to get the data you need. Where that data is falling short, engagement is the tool we use to push for better standards, drive improvements, and ensure the credibility of the sustainable claims being made. It closes the loop, ensuring the impact is real and measurable. 

A more direct and tangible impact 

Why does engagement in alternatives often lead to more tangible outcomes than in the vast world of public equities? Because these investments are typically smaller and more direct. This gives investors greater sway to help create the instruments, define how they are managed, and verify their impact. This powerful feedback loop not only ensures the integrity of a single investment but also helps mature the entire market for sustainable alternatives.