An Introduction to Engagement

Companies play a huge part in shaping our lives in terms of the products and services they offer and the ways they operate.  Their actions shape the world we live in, the lives of the people who rely on them and the environment.

Share ownership gives major shareholders unparallel access to, and potential influence on, the companies they invest in.  This gives investors the opportunity to encourage positive change, providing their requests make sound business sense.

Dialogue, debate and shareholder activism are the mainstay of ‘responsible engagement’ approaches.  Other approaches, such as benchmarking companies against their peers – rating them on their performance, in particular environmental, social or governance practices – are also popular.  Carried out professionally these can be effective ways of positively influencing companies.  Investors who actively engage with companies on social, environmental or governance challenges with the aim of raising standards are regarded as ‘responsible investors’.

Responsible investors often operate alone, focusing on the companies they have large holdings in. They may also collaborate with one another on major issues – where there are substantial challenges or business risks.    A well established example of collaborative engagement is IIGCC (the Institutional Investors Group on Climate Change).

Responsible investors actively vote their shares at AGMs in order to make their views known. Filing shareholder resolutions is also an option, but it is often regarded as rather confrontational in the UK.  It is also more complex and costly – but can be considered a price worth paying if the issue is important enough.  Shareholders tend to only file resolutions when other forms of engagement have failed.

Other powerful ways of engaging with companies to encourage companies to improve their practices include running indices (such as FTSE4Good) which sets and regularly reviews the minimum standards that companies must achieve in order to be included in their indices.

For individual investors who want to encourage companies to behave more responsibly, engagement can be a highly attractive SRI approach – either as part of the strategy of a green or ethical fund or as a standalone strategy.  It can also be particularly useful for planning SRI portfolios where a client wants to make use of non-screened funds but wants to encourage companies to be more responsible.  Although fund manager engagement activity can be pretty impressive, it is still relatively low profile in the retail investment market and can be hard to gather information on.