How do you persuade a company to stop polluting rivers, reduce its carbon footprint or tackle the mistreatment of workers in its supply chain?
If you’re a consumer, you might choose to vote with your wallet and boycott the company in question. However, if you’re a shareholder, selling your shares in protest may not be quite as effective. You might end up simply passing the problem on to other shareholders, while also forgoing the chance to pressure the company into addressing the underlying issues.
An alternative approach is to use dialogue and other forms of soft and not-so-soft persuasion to alter a company’s practices and behaviour. This tactic is known in the investment industry as “engagement”, and it has become the favoured method among fund managers – who invest and manage investment funds on behalf of individual investors.
Fund managers and other large shareholders have long used engagement tactics when it comes to disputes about, for instance, executive pay. However, shareholder engagement has become more prominent in recent years as investors increasingly focus on the social and environmental impacts of the companies they invest in. “Companies are not … perfect,” says Julia Dreblow, founder of SRI Services and Fund EcoMarket, which both provide information on sustainable investment. “Investors need to send them very clear signals to redirect their R&D [research and development] projects and change what they are doing to steer themselves on to a sustainable course.”
Engagement is a broad term for tactics ranging from the relatively informal and understated – such as fund managers having regular background discussions with a company – to more high-profile and confrontational measures, such as tabling shareholder votes on environmental, social and governance (ESG) issues at annual company meetings.
For example, last year, Royal London Asset Management, part of the Royal London Group, sent 141 letters to companies to explain why it was voting against or abstaining on proposals at annual general meetings (AGMs). Common concerns included executive pay, energy use and climate change, and corporate governance.
Engagement can take months, or even years of detailed discussions. “You need to provide evidence for your view of the world [to persuade companies to change]” says Carlota Garcia-Manas, head of engagement within the Responsible Investing team at Royal London Asset Management. “This could be a like-for-like comparison of company performances, showing that companies with more diverse boards do better.”
The process often involves compromise, on both sides.
More dramatically, shareholders might publicly criticise companies and agitate for change, which can make media headlines and increase pressure on a company to act.
These kind of public campaigns also illustrate how investor pressure on poorly behaving companies often coincides with consumer pressure. Indeed, this is one reason why the financial case for responsible investment and the moral case have become so closely linked. For example, if a fashion retailer is using child labour in its supply chain to manufacture clothes and this is reported by the media, it may damage the company’s reputation, trigger a consumer boycott and cause a fall in the company’s share price.
Similarly, investors pushing for more robust climate action might be concerned about the financial risks posed by companies that aren’t doing enough to clean up their operations, but those financial concerns are now increasingly aligned with the concerns of both ethically-minded consumers and climate-conscious governments.
Whatever the impetus behind shareholder engagement, and whatever form it takes, the tactic illustrates how, by keeping a seat at the table and pushing for change, investors can wield financial power and an influential voice.
Collective action
If a company doesn’t make the suggested changes after one-on-one discussions, and the environmental or ethical matter is considered serious enough, asset management companies may cooperate with their peers and shareholder activist groups to lobby a company.
Climate Action 100+ is a group representing investors that collectively manage assets worth about $60tn. It is in discussions with the world’s largest corporate greenhouse gas emitters to encourage them to take necessary action on the climate emergency. It and similar groups − including UN-convened Net Zero Asset Owner Alliance, an international group of asset managers representing $10tn of assets under management and committed to supporting the goal of net zero greenhouse gas emissions by 2050 − also lobby policymakers and regulators to encourage responsible investment.
Collective shareholder engagement is making media headlines and sometimes leading to major changes at companies. Perhaps most dramatically, a group of shareholders teamed with the activist hedge fund Engine No1 earlier this year to oust three board members at ExxonMobil over the oil company’s progress on climate issues.
However, such headline-grabbing, confrontational campaigns can require a considerable amount of time, effort and money. Most of the engagement undertaken by asset managers takes a softer, more slow-burn approach. Indeed, it is often conducted informally and not always made public. And that can make it hard to know exactly how effective shareholder engagement is, in, for example, persuading companies to adopt more ambitious plans to reduce carbon emissions.
However, most investment experts believe that it’s a practical and effective tactic to make the world a better place while also improving value for shareholders who are increasingly concerned with ethics rather than just financial returns.
Learn more about responsible investing by heading to Royal London – The Invested Generation
