MAKING AN IMPACT
There are two motivations driving the rise of engagement polices. The first is to improve corporate governance. A paper published by index and analytics specialist MSCI – Foundations of ESG Investing – concluded that a healthy environmental, social and governance (ESG) policy has a positive effect on valuation, risk and longer-term corporate performance.
The second is to make a positive impact on the world. If, for example, an investor decides to exclude companies that harm the environment from their investment universe, such as oil companies, they cannot incentivise those businesses to help fight climate change.
“It makes sense to talk to companies about how we can mitigate climate change risk and adapt the business model towards transition rather than simply divesting and
ignoring this part of the economy,” Le Jeune says.
Oil giant Shell is an example of what engagement can achieve. At its 2015 AGM, shareholders floated a resolution to significantly reduce the company’s carbon emissions. It was rejected. But last year, the board agreed to halve its carbon footprint by 2050. “That is a significant reduction. The fact that that is similar to the shareholder motion that was previously proposed is interesting,” O’Neill says, hinting that this indicates that there was some form of engagement between shareholders and the board.
Another example of how engagement strategies can be successful came at the start of this year when Shell announced it was doubling its clean energy investment to $2bn (£1.48bn) a year.
Tim Manuel, an investment consultant at Aon, believes that the size of the commitment reinforces the view that excluding fossil fuel extractors could be a missed opportunity to make an impact on the future by being a “partner in the development of clean energy”.
Cynics might say that it is not hard for investors with a responsible investment mandate to find a reason to back oil companies that yield around 5% a year, such as BP and Shell.
If they don’t invest, then for a juicy 5% cash return there will be plenty of other funders ready to step in.
“The problem with divesting is that these companies could be funded by other investors, so they could continue the same activity without improving their business model through being funded by non-responsible investors,” Le Jeune says.
So keeping an open dialogue is the best way to tackle these issues, says Fawzy Salarbux, Candriam Investors’ global head of consultant relations. “That’s the way to bring about change,” he adds.
“You retain your vote and you are still able to engage, to ask them to be transparent in their business models and how they are dealing with their C02 emissions. It is not divesting, it is more a positive screen and retaining a dialogue.”