Key features of the engagement market:
The Engagement Market
- Engagement can be carried out as a stand-alone SRI strategy or alongside screening or thematic investment.
- Many non-screened (‘regular investment’) funds engage with the companies they invest in and actively vote all their shares at AGMs and EGMs. Typically these are funds which are managed by investment houses that offer other SRI options or that have strong reputations for shareholder activism
- Some investment managers apply engagement strategies across their entire equity (or other) portfolios – others focus on specific parts of their portfolio such as a specific country or region
- A small number of fund managers offer ‘Engagement’ funds which apply negative screens to a tiny fraction of their potential investment universe. They do so on the grounds that engagement with certain companies would be futile, because their investors neither do want to invest in certain practices (eg armaments manufacture) but also do not want a fund that significantly alters where it invests as a result of a broad based screened or themed SRI approach
- Many screened and themed ‘green and ethical’ funds carry out engagement as part of the way they operate
- Engagement is substantially higher profile and more popular in the institutional investment market than in the retail (individual investor) market
- Institutional pension funds in particular have widely adopted responsible engagement as a result of legislation passed in 2000
- Responsible engagement can cover a range of social, environmental and governance issues
- Engagement tends to focus on major, mainstream issues with significant implications that may impact a company (or an industry’s) reputation or future success
- Engagement is rarely carried out with regard to non mainstream or niche issues although engagement teams regularly have to take a view on whether or not an issue is likely to become more important over the medium term
- Example high level areas of engagement include encouraging companies to reduce their impact on the environment, address climate change related challenges, manage supply chains more responsibly, improve equal opportunities practices, guard against involvement in bribery or corruption or improve health and safety
- Some investment managers commit substantial expert resources to engagement, employing substantial GSI (governance and sustainable investment) teams. Others delegate this function to external specialists who are contracted to work on their behalf.
- Investors with major in house engagement capabilities that are well integrated with fund management processes can offer valuable insight to companies as they draw on a range of expertise, information sources and objectives
- Responsible engagement can involve putting forward shareholder resolutions at AGMs – but this is complex and relatively uncommon in the UK and not universally popular with institutional investors. They are however sometimes useful as a last resort as, although resolutions generally fail, they do raise the profile of issues both within companies and in the media – which can help encourage progress
- The success of engagement generally rests on whether or not there is a sound business case for change as without one a company will not respond positively as it would not be in their best interest or in the best interest of investors as a whole
- Responsible investors increasingly collaborate with one another when trying to influence larger companies on big issues. The more investors who collaborate on an engagement programme or ‘ask’ the more likely a company is to respond. Investors who are not interested in other forms of SRI are often happy to support collaborative engagement
- Engagement can be carried out for non equity asset types (eg loan stock or property) but requires different strategies and is less common.
- Advisers should look out for fund management companies and asset owners that support major initiatives such as the UN PRI as a demonstration of their commitment to this area