As regulatory interest around responsible investment continues to grow, trustees must demonstrate how seriously they take their role as responsible stewards of their clients’ capital. Engaging with companies on Environmental, Social and Governance (ESG) issues is key to good stewardship – but to engage successfully and achieve real, positive change, trustees should consider how effective and transparent their engagement approach is.
Regulatory interest in responsible investment continues to grow. Last year, the Department for Work and Pensions updated legislation on ESG-related disclosure for UK pension funds, calling for trustees to outline their ESG policies and approach to financially material and non-financial risks, including environmental and social considerations.
Trustees need to show how seriously they are taking their role as responsible stewards of their clients’ capital, demonstrating efforts to create positive outcomes for their clients and the world around them.
What does good stewardship look like?
The UK Stewardship Code 2020 came into effect early this year, updated by the Financial Reporting Council to define stewardship as the “responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.” It signals the greater onus now on asset owners – among them trustees – to ensure that financial decisions reflect environmental and societal considerations.
At BMO Global Asset Management, we believe that good stewardship involves strategic engagement on ESG issues across all asset classes and geographies. The aim is to ultimately enhance long- term value creation for companies, clients, society and the planet, by conducting effective dialogue and building positive relationships with companies to encourage them to respond to ESG considerations.
Good stewardship involves strategic engagement on ESG issues across all asset classes and geographies.
Different ways to engage with companies
There is no ‘one size fits all’ for engagement; effective engagement requires a strategic, tactical approach that is tailored to each company. It often involves travelling to meet companies personally; sitting down with boards and senior management to discuss key issues. Sometimes collaborations with other investors or non- government organisations are a more effective approach, as a way of escalating engagement if companies resist calls to change.
We have been engaging with BP for two decades, both on an individual basis and through collaborative engagement activities, such as Climate Action 100+, a global collaborative investor engagement initiative which we have actively participated in since its launch in late 2017. It co-ordinates engagement with 100 ‘systemically important’ companies accounting for two-thirds of annual industrial greenhouse gas emissions, as well as over 60 others, with the opportunity to drive the low-carbon transition. We have co-led six company engagements and participated in engagements with a further 17 companies.
Investors are increasingly active in using their shareholder vote to press for change, particularly if engagement has not been productive. At the AGM of ExxonMobil, we voted against the re- election of incumbent board members as a result of the company being insufficiently responsive to investors that were seeking to engage as part of the Climate Action 100+, combined with our assessment that there had been a lack of board oversight evidenced by the company’s public and strategic response to climate change lagging its peers.
Engagement does not automatically result in positive outcomes; the success of engagement depends on the approach.
What is the difference between good/bad engagement and what impact that can have on a scheme?
As expressed above, engagement does not automatically result in positive outcomes; the success of engagement depends on the approach. ‘Good’ engagement is strategic, linked to the business case of the company in question and persistent over time. Using this approach, engagement can support performance over the long term: a review of over 200 academic papers found that 88% showed a link from good ESG practices to good business performance.2 We ensure our engagement with companies reflects this by setting ‘milestones’ as measurable outcomes we aim to achieve, which helps us track our progress and provide a high level of transparency to our clients through reporting.
In contrast, engagement that is disconnected from the asset owner’s investment case or process, as well as generic letter writing, has little impact and can therefore be considered as ‘bad’ engagement. And, from an investor perspective, if a particular company is unwilling to engage, whether on an individual or collaborative basis, it might be time to consider putting engagement efforts on hold and divesting.
By Vicky Bakhshi
Director – BMO