“We believe it is in the interest of our investors that we engage with our investee companies to minimise risks, protect and enhance shareholder value, promote greater transparency on ESG issues, and encourage companies and issuers to develop and become more resilient over time”
Impax Engagement Report 2020, BNP Paribas Asset Management
[dropcap4]E[/dropcap4]ngagement, by definition, is action intended to bring about a change of approach or behaviour at a company. Fund managers focused on ethical investment routinely use engagement as a mechanism to signal concern to companies relating to ESG (Environmental, Social & Governance) issues, and it is seen as a fundamental part of their fiduciary responsibilities for investors.
Engagement strategies range from sending letters and making phone calls to informed proxy voting, filing a shareholder proposal or being involved in annual general meetings (AGMs). They can also include dialogue with a company or with a large group of shareholders, having private communication with company experts or targeting directors through ‘vote no’ campaigns and other board-focused strategies.
Engagements are often conducted by fund managers as part of their regular meetings with company management teams, through additional conference calls, meetings, email exchanges or as part of joint communications with the investment community. Engagements are regularly conducted together with other investors and partners with or without a lead or coordination from responsible investment organisations. Collaborative engagements are conducted across a number of ESG issues and specific sectors and companies. Collaborative engagements can be prioritised where outreach may particularly benefit from a larger group of shareholder involvement or in cases where an issue is being escalated.
Engagement with companies is evolving and there is an increasing understanding and agreement that investors must move away from merely counting the numbers of engagements done with companies, and move to assessing in more detail and rigour what the actual ‘outcomes’ were. Investors are increasingly setting out engagement objectives and rigorously assessing contribution to change from engagement activities, versus positive developments happening in companies anyway.
The Impax Engagement Report 2020 (BNP Paribas Asset Management) provides some examples of the success of their ongoing engagement work:
- In an example of ‘physical climate risk’ (PCR) engagement, Impax engaged with a specialist manufacturer of textile fibres and pulp raw materials to gain an understanding to what extent the company manages its exposure to physical climate risk. Impax presented initial findings of a PCR scenario model assessing the company’s exposure to physical climate risk at plant and facility level. The company was very receptive to the analysis and said it was very helpful as they are trying to push the sustainability and PCR agenda internally and at board level. Following the latest engagement, they communicated their interest in Impax’s analysis of the company’s exposure to physical climate risk which they had taken to the board, indicating that the company is working on the issue internally. The topic and data are also core to a company wide TCFD report currently in preparation.
- In an example of ‘diversity’ engagement, Impax engaged several times in 2018 and 2019 with a Japanese company regarding its gender diversity profile. There was a total lack of gender diversity both in the management team and at the board level, which is not unusual for Japanese companies. Following the engagements, the company appointed its first female director in early 2019 and in Q4 2019 the company announced they were making three further female appointments to the board and to the management team. The company confirmed that Impax’s engagement had been instrumental in driving these changes. Work is ongoing and Impax will continue to encourage the implementation of diversity policies and targets that can ensure that these diversity improvements become permanent practices and structures in the company.
In 2020 the COVID-19 pandemic has brought many sustainability issues into sharper focus, especially in the ‘S’ – the social aspect of ESG. Fund managers are looking closely at how companies are handling worker health and safety, human resources management, customer safety, and community impact. Whilst all of these areas have been of concern to ethical investors for a long time, the pandemic has brought them into the spotlight.
Australian investors have access to a wide range of fund managers who engage with companies to achieve positive ESG outcomes. If investing ethically is of interest to you, contact us to find out more on 08 9322 1110 or clientsupport@justinvest.net.au
Source: Impax Engagement Report 2020 (BNP Paribas Asset Management). See also: Engagement Strategies
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