Feature | ESG
Sometimes words speak louder than actions. This is particularly true for those looking to improve corporate cultures. Investors sitting down to talk with the lead- ers of their portfolio companies to facilitate change instead of simply throwing their hand in the air to vote against them at AGMs is becoming a crucial part of envi- ronmental, social and governance (ESG) investing. More commonly known as engagement, holding such discussions with companies behind the scenes is designed to create change in areas that include recruitment, harmful gas emissions or transparency among others.
“Through engagement we aim for change,” says Carola van Lamoen, who leads Robe- co’s active ownership team.
Engagement is a big part of helping inves- tors to build a more sustainable world. Indeed, active ownership is one of the United Nation’s six Principles for Respon- sible Investment (PRI).
Engagement typically takes two forms: gathering information to understand a company’s ESG profile and to change behaviors. Helena Viñes Fiestas, head of sustainability research at BNP Paribas Asset Manage- ment, says that engagement is part of the fiduciary duty. “How are you going to understand what a company is doing unless you are engaging with them?” she adds.
This is a big issue for BNP Paribas AM. Since 2016 it has changed its voting policy to include ESG factors twice. So if, for example, a company will not provide infor- mation on carbon emissions or their 2-de- gree strategy, the asset manager will vote against the board’s nominations. Engagement is about changing behaviors, not business models. It will not, therefore, help those who invest in a tobacco company but don’t approve of smoking or those with a low carbon policy backing an energy company that generates most of its power from coal.
MAKING AN IMPACT There are various categories of engage- 26 | portfolio institutional | April 2019 | issue 83
ment. First there are conversations target- ing governance, which tends to be a priority for investors. “When there is good governance there tends to be good man- agement of ESG issues,” Viñes Fiestas says. Then there are investors or portfolio man- agers speaking to companies about ESG issues. There are also industry-wide pro- jects, such as encouraging sectors to improve access to medicine or nutrition. Finally, there is emergency engagement which takes place in the aftermath of a scandal. Measuring the impact of these dialogues could be difficult. This is especially true when it comes to long-term issues, such as climate change. It is difficult to know if a decision made by a company was the result of something you said or a result of pres- sure from the other parties in society that are working to tackle the issue. Asset manager Robeco has enjoyed a dia- logue with Royal Dutch Shell for years and in 2018 there was a breakthrough. In col- laboration with the Church of England and others, the asset manager persuaded the oil giant to set climate targets, the success of which are linked to the amount it pays its executives. This is believed to be the first oil and gas company to commit to such a policy. Ian Burger, head of governance at Newton Investment Management, says: “If engage- ment didn’t work, we wouldn’t do it.” He points to getting a US consumer goods company to produce a corporate social responsibility report following several meetings with management as one of the firm’s successes. So the strategy is effective, but success is not guaranteed. If an engagement team fails to persuade a management team to provide it with information or make chang- es after several requests, the option open to long-term investors is to divest. “It would be incorrect for me to say that we are always completely successful,” Burger says. “There are occasions when engage- ment has not had the desired effect, which has ultimately led us to divest or not invest in the first instance.”
Success in engagement is not just about Royal Dutch Shell or BP announcing that they are investing more in cleaner energy sources. It can be the little things that can make a difference to have companies are run too.
A WIDER STRATEGY “Engagement is
different from voting.
Engagement is starting a conversation pro- actively,” van Lamoen says, pointing out that voting at AGMs is a more reactive form of active ownership. Most engagement between companies and investors happens all year round outside of AGMs, but public meetings with share- holders do have a role to play. “Sometimes a shareholder proposal is a last resort, a sign maybe that engagement failed,” says Alan Brett, head of corporate governance ratings research at MSCI. “It is an extra lever to make sure that you are lis- tened to when companies are not listening.” From the people I have spoken to for this article, engagement appears to be a strategy that is more popular in Europe than the US, where filing resolutions at shareholder meetings tends to be the preferred route creating change across the Atlantic. “In Europe, it is more under the radar, it is more subtle, but it definitely works,” says David Czupryna, Candriam Investors’ head of ESG client portfolio management. Engagement is not a policy that should be used in isolation. It is not a substitute for integrating ESG into your investment deci- sions. “When you integrate ESG you are doing a risk management exercise,” Viñes Fiestas says. “Engagement is about the companies that you want to continue investing in.” So it is clear that engagement is part of an overall strategy that starts with an ESG pol- icy. “To get the most benefit from engage- ment we believe the most effective approach is to integrate it within the investment process,” Burger says. Mette
Charles, a senior investment
research consultant at Aon, adds that you need a responsible investment policy first to be able to spin-out the engagement
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