Using proprietary engagement records from a large European asset management company, we study how ESG shocks shape institutional monitoring. We find that salient negative incidents are a powerful trigger for engagement, as they deteriorate public sentiment, heighten investors’ reputational concerns, and reveal new information about previously hidden ESG weaknesses. Investors respond not only to incidents involving focal firms but also to incidents at peer firms, consistent with both reactive monitoring of revealed ESG risks and preemptive monitoring based on shared risk signals within the competitive environment. Incident-driven engagement is more informed and consequential: it mitigates subsequent sentiment deterioration, reduces future ESG incidents, attenuates declines in institutional ownership, and contributes to higher firm value. Finally, more intensive engagement is significantly more likely to succeed. Overall, our research speaks to the fundamental question of how engagement is initiated and underscores its role as an effective channel of external corporate governance.
