by Tytti Kaasinen, Head of Stewardship & Risk Engagement at GES
Next Sunday, like every 10th December, the Nobel Prize award ceremony takes place. This year, however, we in the responsible investment circles should be particularly excited about the event because the Prize for Economic Sciences will essentially go to engagement! Lost? Let me explain.
Engagement, as we all know, means influencing company behaviour and intervening in order for them to improve and make better decisions. It is not about forcing, and certainly not about paying, for them to do it. No: the idea is to provide insights and prompts for the companies to consider, with the aim of informing them about a better way of doing things and consequently making them want to take action that leads to positive outcomes. Engagement is not about getting companies to change just because we asked them to but because they themselves judge the relevant measures to make sense. Ultimately, the revised behaviour is in the interests of the companies, engagers and society alike.
Now replace the word ‘engagement’ with ‘nudging’ and the word ‘companies’ with ‘individuals’ and you pretty much have the definition for nudge theory, coined by Richard Thaler, this year’s Nobel Laureate for Economic Sciences. His concept, illustrating behavioural economics in action, has been more commonly applied in the public policy setting but the similarities with the principles of investor engagement are obvious. Both focus on altering decisions and behaviour in a constructive, non-coercive manner in order to achieve a certain objective, and both have feedback and impactful communications at their core. Importantly, nudging is not just a theory but centres on making a difference in the real world, just like engagement.
Mr Thaler acknowledges the pertinence of the human factor within economics and this is something that we at GES very much agree with. A company does not make decisions, the people working there do. Indeed, the success of our engagements and the mutually beneficial outcomes – be they economic or non-economic – are largely due to trust, respect and understanding having been developed between individuals, and are built on actionable information having been transmitted from one person to another.
Nudging companies in the right direction is everyday business for GES and we have always known that engagement has direct relevance to the market, finance and economy. Still, it is nice to get this confirmed for the record by the Nobel committee. To celebrate engagement semi-officially entering the big league, I wouldn’t go as far as to adopt Richard Thaler’s terminology and swapping ‘engagement’ for ‘libertarian paternalism’, but perhaps we should start calling ourselves choice architects instead of engagement managers?
 Disclaimer: I am not an economist nor a psychologist, and as such can hardly do justice to this eminent theory. Please read more at e.g. nudges.org; https://behavioralpolicy.org/what-is-nudging/; or www.theatlantic.com/business/archive/2017/10/richard-thaler-nobel-economics/542400/