An introduction to shareholder engagement

Can sustainable investment lead to positive changes by global corporations?

For many people, investing their wealth is a key tool for achieving their goals in life, be that living comfortably, having a good retirement, or helping the next generation get started. But as they do this, people often tell us that they want to choose ethical investment, to try to align the way their money is invested with their values.

As a B Corp, we believe that business can and should be a force for good and have purpose beyond profit. Our responsible investment portfolio is now the default for new clients. However, while we can select the right funds and put together portfolios for people who want sustainable investment, it’s reasonable to ask ourselves what has genuinely changed in the real world?

For most of us, the majority of our investments are in existing publicly listed companies. Whether we choose to invest in these companies, or deliberately choose to avoid them is not likely to make any real world difference to what those companies do. Investors don’t necessarily create any new positive change or impact by choosing to invest in listed companies that focus on building a better world. Neither do we necessarily avoid any negative impact happening in the real world by avoiding investing in companies who have poor social or environmental performance. If we choose not to invest those companies, there are still likely to be other investors willing to provide capital and so the companies in question may not change their behaviour.

So how can you invest your money wisely, knowing that humanity and the planet urgently need companies to make significant changes?

We believe the best chance of positive change is strong shareholder engagement by fund managers, to encourage companies to make positive changes and become sustainable. Effective engagement relies on fund managers leveraging their position as major shareholders.

Unfortunately, many of the companies in the global stock market may be: ambiguous about the environmental impact of their supply chain; Make unsubstantiated claims about their sustainability efforts; Fail to walk the talk when it comes to diversity and inclusion; Neglect the communities in which they operate; Use excessive packaging… the list goes on.

Shareholder engagement – where fund managers actively engage with senior teams of the companies they invest in – aims to get to the root of issues through influencing corporate policies and practices.

How can this be done?

There are several levers which a fund manager can use. It can be very effective to hold private meetings with senior management at a company. This creates an active dialogue between the fund managers as shareholders and the company. It gives them the opportunity to ask them for information directly about issues of concern, such as their carbon emissions, or modern slavery in their supply chain and then work towards a solution.

As shareholders they have significant influence, being able to vote at company’s annual general meetings and propose resolutions for a vote. A majority of shareholders could therefore vote to require the company to make a change, such as to be more transparent in publishing information, to set a credible net zero reduction plan, or even to appoint or remove board directors.

Fund managers also have other powerful levers to influence change, such as issuing public statements, or raising concerns via media outlets. Collaborating with other investors is a powerful way to speak with a louder voice and have greater influence. It is also important to have the threat of divestment as a last resort if it’s clear that a company is unresponsive to requests for change.

We need to focus on the actions that create impact in the real world. For this reason, it is important to invest via fund managers who are prepared to use their votes and voice. As shareholders, they need to encourage companies to take steps forward and be part of positive, transformative change.“

A concern with relying on engagement by fund managers is that we don’t necessarily know much about the quality of the engagement with companies – to simplify an example, are their meetings essentially an annual catch-up chat, or a robust examination? To analyse this, it’s important to understand the engagement policies of fund managers. Will they only engage about financially material risks that affect share price? Or are they engaging with a broader remit and holding companies to account about things that may be harming people or the planet, but aren’t yet directly affecting sales or share price?

Engagement in practice

Here are some great examples of actions fund managers have taken to engage with companies held in their funds:

Legal & General: followed their policy of setting out clear expectations and then voting accordingly. They view this, alongside public pre-declarations of their vote intentions on important proposals, as an important engagement escalation tool. In 2021, they publicly called on companies to propose a ‘Say on Climate’ vote, allowing shareholders to cast their verdict on the climate-transition plans proposed by company management boards. Over the 2021 AGM voting season, they voted against several high-profile proposals where they felt the transition plans proposed were not sufficiently robust or credibly aligned with net zero. In 2022, they voted on 48 companies’ ‘Say on Climate’ proposals. On 32 of these (66.7%) they voted against.

Northern Trust: engaged with CSPC Pharmaceutical Group in an effort to increase board gender diversity. Northern Trust had noted that the board of directors lacked diversity, with all members being male at the time of the 2022 annual general meeting. Additionally, the company paid excessive non-audit fees to its external auditor, raising concerns about the auditor’s independence. To address these issues, Northern Trust took action. They voted against the re-election of a member of the nomination committee and requested the appointment of female directors. They also voted against the election of three board members due to the excessive non-audit fees. As a result of this shareholder activism, the company agreed to recruit eligible and experienced female directors. Additionally, the company confirmed that it would not pay such high non-audit fees in the future.

Impax: has engaged with biological drugs organisation, Repligen, on sustainability processes, governance and disclosures. This has resulted in improved reporting, governance of sustainability included in its first sustainability report, and better target setting. These are significant milestones, and the dialogue continues.

WHEB: encouraged SolarEdge, a manufacturer of components for solar panels, to develop a strategy to achieve net zero carbon emissions by 2050. Frustrated with its emissions target of 30% reduction in emission intensity by 2025, WHEB worked with the ‘Investors for Sustainable Solar’ group to escalate engagement. They jointly prepared a document that outlined clear expectations for SolarEdge. The company plans to set an absolute emissions target once its growth rate has stabilised. As is often the case with engagement, efforts must continue over the long term.

Columbia Threadneedle: for the past four years, Columbia Threadneedle has encouraged UK housing associations to issue bonds that have specified use of proceeds, such as green, social or sustainability, rather than general corporate purpose bonds. Special use of proceeds bonds focuses on projects that have clearly identified social and/or environmental outcomes and targets. In the last year, Peabody, Stonewater and Jigsaw have issued sustainability bonds for the first time, which were invested in by Columbia Threadneedle.

Engine No.1: succeeded in blocking the appointment of three directors at Exxon Mobil and persuading major shareholders to vote to instead appoint three directors who would advocate for lowering the company’s carbon emissions. (Engine No.1 assets are not held in Paradigm Norton portfolios, but provide an example of the power of shareholder engagement)

We are seeing more of this activity across the industry, but further work is needed. As a B Corp, we believe that business can and should be a force for good. We don’t just take the narrow view that engagement should solely focus on maximising return on investment. Holding boards to account, good governance, and minimising ESG risks is crucial. But there are lots of other ways in which a global company might have an impact on the world and humanity. They need to be held to account for these impacts, both for the sake of people and planet affected today, as well as for the next generation.

If you would like to find out more about how we actively encourage better fund manager engagement, and how we are changing how clients think about financial planning please get in touch.

Steve Watters – Head of Impact

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This article is distributed for educational purposes and should not be considered investment advice or a recommendation of any particular security, strategy, or investment product.