In our discussion with mining company BHP, healthcare company Clicks Group and packaging company Smurfit Kappa, the main takeaway was that investor engagement on ESG issues has levelled up significantly in the past couple of years in terms of quantity, but that it’s the quality of the engagement which really makes the difference in terms of that engagement having an impact.
A simple investor letter doesn’t quite cut it anymore
The companies we spoke to agreed that investor engagement is most effective when it is personalised and specific. That involves the investor doing their homework, and building an understanding of which ESG issues are most material to that company’s business, and how the company is currently performing against sector best practice. This knowledge then allows investors to make targeted suggestions or expectations for how the company can improve accordingly. Companies can use this engagement to raise the ESG issues at hand internally at the Board and senior executive level – and the more specific the engagement is, the more useful it is for the company in terms of considering and implementing recommendations.
"What we have found in our engagement with the more engaged, sustainability-orientated investors is this encouragement to be more ambitious… that’s been very useful for us, especially from a large investor, because it provides a reference point when talking to the Board and senior management.”
Garrett Quinn, Head of Investor Relations, Smurfit Kappa Group
Reporting on progress
Investors should also ensure they improve their ESG engagement reporting. Again, the shift here should be away from quantity and towards quality – many companies are trying to learn from the experience of others, so details are useful here. The number of companies engaged and the total number of dialogues can create some pretty impressive stats – but the real value comes from diving deeper into these dialogues to give a detailed story about the engagement and the outcomes reached. At BMO Global Asset Management, this is an area we are very committed to. Each year we produce our responsible investment review, which includes plenty of engagement case studies and demonstrates instances where our engagement has created positive change. We also produce annual impact reports for a growing number of our responsible and sustainable strategies, which include examples of our engagement with companies over the past year, alongside impact metrics such as carbon intensity and executive pay levels.
Escalation routes are available
From the investment side, however, it’s important to note that one-toone dialogue isn’t always successful. But instead of just divesting from a company unwilling to cooperate on ESG issues, responsible investors can adopt a stronger stance to trigger a corporate reaction by using various escalation techniques. We can collaborate with other investors to increase pressure on a company; we can use our voice at the ballot box to vote against management on key resolutions and thereby send a clear signal to the company; and we can attend AGMs for the chance to have direct, public dialogue with boards and top executives.
Recent examples of oil companies unwilling to adequately address climate change concerns demonstrate how serious attention is now being paid to the issue. We recently put investor pressure on Shell by voting against its energy transition targets at its recent AGM to push the company to adopt more ambitious targets. And then, in a landmark court ruling, the company was ordered to cut its CO2 emissions by 45% by 2030. ExxonMobil and Chevron have also faced intense shareholder pressure over their failures to set proper strategies for a low-carbon future. Hedge fund activists at Engine No. 1 successfully replaced two ExxonMobil Board members with their own candidates, while 61% of Chevron shareholders voted in favour of an activist proposal from campaign group Follow This to force the group to cut its carbon emissions.
What came across clearly in our discussion with BHP, Clicks Group and Smurfit Kappa is that ESG engagement is most dynamic and works best when investors work in partnership with companies to encourage them to be more ambitious around their sustainability goals and how to achieve them. This can ultimately drive companies to take concrete steps towards ensuring their products and services contribute towards a better, more sustainable future for us all.
“What’s really been useful is for asset managers and shareholders to have taken the view that they understand that corporates are on a journey towards improved sustainability performance.”
Bertina Engelbrecht, Group Corporate Affairs Director, Clicks Group
As outlined above, as investors we do have escalation routes available and, ultimately, divestment is an option, but we believe we can add more value to the world around us if we use our influence as stewards of large amounts of capital to keep driving important ESG conversations, rather than automatically selling out of holdings that don’t align to our sustainability criteria.
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
© 2021 BMO Global Asset Management. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management services, institutional client services and securities products. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorized and regulated by the Financial Conduct Authority. 1409578 (07/21). This item is approved for use in the following countries; UK.
This article was featured in Pensions Aspects magazine September edition.
Last update: 15 September 2021