Engagement is the practice of investors in a company working with the management of that company to influence behaviours, and within an ESG context this can include the way the company's activities impact the environment and society.
As more fund managers are coming under pressure to deliver ESG-focused investments, their engagement with their investments and how their ESG credentials play out have become crucial.
Hugh Cuthbert, European and global equity fund manager at SVM, says the bottom line when it comes to engagement is that company management will respond to the incentives that are created for them.
He says that apart from voting against management at the annual general meetings of companies he is invested in, the best way to achieve long-term change is by encouraging a structure where, if ESG targets are not met by the company, then the bonuses of the top management are withheld.
He notes this will incentivise company management to behave in a way that delivers on the responsible investment outcomes they speak about when they talk to fund managers.
Cuthbert adds that engagement is important as a way to enhance the returns for investors, as “[if one] just buys a fund of perfectly ESG companies, one would be buying an expensive fund.”
Types of engagement
John Fleetwood, director of responsible and sustainable investing at consultancy Square Mile, says: “"Engagement comes in two forms. The first is direct engagement with investee companies; meeting with company management to question them and influence them on responsible investment issues.
"This sometimes involves sharing best practice, or might mean questioning them on their climate policies and practice, or on ensuring that human rights are respected in their supply chains.
"The second type of engagement is collaborative in nature and can take the form of advocacy or collective lobbying to bring about change.”
Sebastian Thevoux-Chabuel, ESG analyst and portfolio manager at Comgest, tends to buy established companies with proven track records in financial and ESG terms, but says regular interaction with companies is always worth doing as “there is no such thing as the perfect company”.
Sarah Norris, investment director at Aberdeen Standard Investments (rebranding as Abrdn in the summer), says engagement is part of any normal investment process, not just ESG, and is about assessing the investment risk of a company.
She says the ESG element of engagement is about “getting comfortable with the balance of risks” associated with a company’s policies in relation to treatment of employees and the impact on the climate and wider society.
She describes engagement as “an ongoing process” rather than just something that happens when the AGM takes place.
Shaunak Mazumder, global equity investor at Legal & General Investment Management, says that as a fund manager his priority is to buy companies that he thinks are well run and are ESG-compliant, but adds this approach does not render engagement unnecessary.
He says: “The first stage is to eliminate companies such as tobacco, that have business models that cannot be ESG even if you engage with them.