Engagement can be used to encourage more responsible business practices. It usually takes the form of dialogue with companies or voting at Annual General Meetings (AGMs) and is typically carried out by fund managers on behalf of investors.
What is engagement?
Engagement is the process by which investors seek to maintain or improve corporate social, environmental, ethical (SEE) or governance policy, management or performance.
Reasons for engaging
Your charity may wish to use engagement to:
- encourage more responsible business practices
- encourage greater transparency and disclosure
- influence corporate behaviour to further the mission of your charity
- find out what companies are doing in relation to areas of concern to your charity
- Potentially improve investment returns by encouraging companies to manage SEE risks or to address new social or environmental business opportunities
- fulfil your responsibilities as an active share owner (This refers to investors’ understanding of, and approach to, the broader responsibility of company ownership, the activities of the company and its role in society and the economy.)
Forms of engagement
Engagement usually involves:
- gentle (or firm) persuasion
Engagement can take the form of
- informing companies how their actions will affect your investment decisions
- encouraging and persuading them to improve certain policies and practices
- offering to help them formulate a policy or improve an approach to an issue of concern (This may be particularly relevant for a charity with an expertise in a particular area e.g. an environmental charity helping a company create a policy on biodiversity.)
Benchmarking the success of engagement is difficult. It is not always possible to determine the extent to which any company’s shift in policy and practice is due to any one investor’s engagement with it. But there is evidence that Company behaviour has been influenced by investor engagement.
Ways of engaging
Usually a fund manager will engage with companies on behalf of investors. This is typically done for financial objectives, and your charity may have to negotiate with your fund manager if you want non-financial engagement.
Fund managers take different approaches to engagement. They place different emphases and employ different strategies.
You can use the list of questions to ask fund managers given below to help ascertain which of their engagement approaches best fits with your charity’s mission and reflects issues of concern.
It is also possible for your charity to engage directly with companies, though this can be a time-consuming process.
It is also possible to undertake collaborative engagement in co-operation with other investors.
If applied discretely (i.e. not in combination with positive or negative screens) engagement means that any company within an investable universe can be purchased by the investor. Specific social, environmental, ethical or governance criteria can then be used to identify which companies to engage with.
Questions for Fund Managers on Engagement:
- What is the focus and emphasis of the engagement policy? What are the main themes and priorities and how are they decided? What is the strategy to select companies for engagement? Does the engagement policy only apply to UK equities?
- What engagement methods are used? Is it one-to-one meetings, letters, or attendance at company presentations?
- What is the fund manager’s voting record at AGMs and EGMs?
- What kinds of resources are devoted to engagement? Does the fund manager have a dedicated in-house team and/or purchase independent data?
- How does the fund manager report on their engagement activities? How much information is made available to clients? (Good reports demonstrate that the fund manager has a full understanding of SEE issues and, equally importantly, how this impacts the company’s bottom line.)
- How does the fund manager measure the impact of their engagement?
- Is the fund manager involved in any Responsible Investment initiatives (e.g. member of UKSIF, Institutional Investors Group on Climate Change, Responsible Investors’ Network, Carbon Disclosure Project or Enhanced Analytics Initiative)?
- What independent review is there of engagement activity?
As a shareholder, you also have the opportunity to vote on a number of issues at company AGMs. Traditionally, shareholders have let fund managers decide on whether and how to vote, but voting is now increasingly seen as part of a shareholder’s duty as a responsible owner.
Awareness is growing of how voting can be used to influence companies. Voting can be used to communicate dissatisfaction to companies and the media.
Shareholders may file a special shareholder resolution to be voted on by shareholders at the company’s AGM. In recent years, a few special resolutions have been filed on social and environmental issues, including at BP, Shell and Balfour Beatty.
Such resolutions can highlight social or environmental issues with other investors. They can also send a signal to the company’s management of the need for change if enough investors abstain or support the resolution.
Your charity could work individually or collaboratively to raise shareholder resolutions and vote on the resolutions raised by others.
However, filing shareholder resolutions in the UK is a relatively difficult process, due to the level of support needed.
If your charity owns shares in the US you could instruct fund managers to vote on social and environmental resolutions filed there.