Can Active Engagement Bolster Investment Performance?

August 19th, 2022 | David Frazer, MA

ESG engagement is an increasingly important aspect of being a responsible investment manager. Engagement can be accomplished both directly – when the investment manager contacts a company themselves (usually regarding environmental, social or governance (“ESG”) factors that may harm shareholder value long-term) – or collaboratively – where various managers pool resources and concerns together to achieve a greater positive impact. One question that is worth examining is whether there is a link between the use of engagement as a central part of an investment strategy and investment results.  

The Mackenzie Betterworld team set out to see if there was a relationship between funds that used an engagement strategy and investment performance by looking at investment funds that identify ESG engagement[1] as a key investment strategy, and those that meet the criteria for being a dedicated sustainable equity fund.

Our research found that over the 3- and 5-year periods ending February 28, 2022, the average return of global engagement funds outperformed their respective peer groups[2], and that outperformance was heightened when we looked at global engagement funds that also had a sustainable investment objective. 

 Table 1: Relative Fund Performance for Engagement funds versus all Actively Managed Funds [3]

In our study, we started with a universe of Morningstar tracked equity funds and restricted it to include actively managed funds only; screening out index funds and ETFs. We also screened out “fund of funds”, funds that have fewer than 20 holdings, and funds that have more than 1,000 holdings. We included all fund domiciles and looked at this analysis for three distinct peer groups, based on their regional equity focus – Global Large Cap, US Large Cap and European Large Cap. For each of these peer groups we analyzed performance for three baskets of funds: 

  1. all funds, 
  2. engagement funds and,
  3. funds that actively utilized engagement and also had a sustainable investment objective

How Engagement Affects Performance

While we recognize that correlation does not necessarily imply causation in the case of superior performance for engagement and sustainable funds, we believe that there are some reasonable explanations for this historical outperformance.  

Previous research on engagement and fund performance by the Society of Financial Studies found that successful engagements on ESG concerns are followed by positive abnormal returns, and that “after successful engagements, especially on environmental and social issues, engaged companies  experience improved accounting performance, improved governance, and increased institutional ownership.”[4]   We believe these improvements are caused by the following:

  • Engagement allows fund managers to better understand how a company perceives risks, and the extent to which the firm can manage those risks. 
  • Engagement opens dialogue which can reveal gaps in the company’s management and reporting of ESG issues. 
  • Investors can make suggestions for change directly with the board and executive management. 

In our experience, ESG engagement on sustainability issues provides a competitive advantage for investment funds by infusing engagement findings into the investment process. Companies may benefit from embracing shareholder engagement due to growing investor attention on the reporting of improved ESG performance.

Figure 1: Active Engagement Cycle and Impact Process.

A circle with "Active Engagement Cycle" in the centre. Around it is 1: Investor Recommendation 2: Company Acts 3: Impact and Investment
Image: Mackenzie Betterworld


As demonstrated in table 1 above, funds with ESG integration and robust engagement on sustainability and ESG issues have outperformed actively managed funds in European, US and Global markets. This outperformance was strongest in US markets with 2% or more outperformance in both 3- and 5-year periods, followed closely by European markets and then Global markets. Outside research appears to support these results due to the characteristics unique to sustainable funds with engagement mandates. While engagement may not be the sole driver of outperformance, we believe that it contributes to a 3-part cycle: by providing recommendations to companies, companies acting and in turn gathering increased investment and interest from investors. 

Engaging with companies plays an important role in maintaining not only portfolio ESG performance but also accountability for companies and encouraging more sustainable business models. All of which contribute to, according to our research, higher returns in the medium and longer term.

[1] Morningstar defines their “ESG Engagement” attribute as those that specifically discuss in fund level documents using active ownership practices (raising resolutions, active proxy voting, and direct company engagements) to pursue ESG goals with invested companies. Sustainable funds refer to funds that have a specific sustainable investment objective. 

[2] We used three distinct peer groups, based on their regional equity focus – Global Large Cap (funds with at least 20% of their AUM in US stocks), US Large Cap and European Large Cap. The table represents a comparison of average returns for each group.

[3] Research completed in collaboration with RBC ESG Research. Note: the 3-year period is capturing performance from March 1, 2019 to February 28, 2022 and the 5 year period is capturing performance from March 1, 2017 to February 28, 2022. 

[4]  Dimson, Karakas and Li: Active Ownership. The Society for Financial Studies. Oxford University Press.

Contributor Disclaimer
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.


author's photo

David Frazer, MA

Director ESG Research
Mackenzie Investments

David brings over 10 years of experience including ESG research and engagement with a focus on diversity and inclusion, business ethics, responsible taxation, and corporate culture. He has led engagement campaigns in the technology, pharmaceutical and banking industries, holds an M.A. in international economics from Johns Hopkins University School of Advanced International Studies, and is also currently pursuing an LL.B at the University of London.