For investors looking to own sustainable businesses, engagement is the new divestment.
For responsible investors talk isn’t cheap. Not only does research suggest that keeping an open dialogue between investors and company boards could potentially generate longer-term profits, but it could also make a positive impact on our lives. Appetite among institutional investors to use their status as owners to convince directors to make changes to their business is growing.
The arguments for engagement are outweighing those for divestment, where certain industries are excluded from the investment universe altogether. “Influence is achieved by changing behaviours through engaging with the company rather than divesting,” says Sacha Sadan, LGIM’s director of corporate governance.
Victoria Barron, a responsible investment analyst at Newton Investment Management, says that the way pension funds and asset owners are seeing ESG is changing. “Instead of it just being a tick-box approach they want to know more about what is happening and what conversations are occurring with the companies we are investing in,” she adds.
One asset owner that has ditched an exclusion policy in favour of an engagement model is the United Reform Church Pension Fund, which handed a mandate to Newton’s Sustainable Global Equity fund in January. Newton investment director Jon Bell expects to see more schemes adopt similar polices. “There is now a greater awareness of engagement and a desire to see more of it from pension funds,” he adds.
“Rather than take the leap to full exclusion they are very keen to see us engage.” It appears that investors are warming to engagement after having learned a few hard lessons in recent times. “Since the financial crisis investors have become much more aware of the risks in their portfolios and pushing investee companies to be more responsible and manage their risks better,” says Solange Le Jeune, a senior ESG analyst at Candriam Investors.
Investors are becoming more vocal in how businesses should be run, Aon investment consultant Jennifer O’Neill says. “As investor conscience grows around responsible investment then engagement is rising.”