How sustainable funds manage engagement

But Matt Crossman, stewardship director at Rathbones, says that a combination of greater public awareness of the issues, and greater clarity from regulators and policymakers, means “companies now know you have to prove the actual impact of what you are doing is positive.

"The Financial Reporting Council is framing things in a way that is asking companies ‘what did you achieve in this sustainability area this year?’, and that means we are much more confident now when we are interacting with companies [as] we know what they are doing.”

Sandra Crowl, stewardship director at Carmignac, says a key way to understand if a company is serious about being more sustainable is to ask them to identify the negative impacts that may be occurring as a result of their business activity.

We look to identify companies where their contribution to the sustainable development goals is under appreciated by the market.

"And if they can identify those," Crowl says, "what specific targets do they have to show they are serious about addressing those impacts?

"We are starting to see attitudes changing among company management, many of those are asking us [if] they can have another meeting with us a few months later as they want to do more.”

Duncan Goodwin, who runs the Premier Miton Global Sustainable Growth fund, says the traditional way many fund houses dealt with engagement was to outsource it to third-party agencies, but he says this is changing.

“Just as with identifying unrealised growth or value, we look to identify companies where their contribution to the sustainable development goals is under appreciated by the market.

"Engagement can often consist of highlighting the gaps in reporting, both in terms of alignment of revenues with the [sustainable development goals] as well as more traditional ESG metrics. We have yet to find a tool as effective as a company meeting or call to identify both risks and opportunities at the company level.”

Voting

Of course some companies need to be engaged with more than others, and the tools ESG fund managers have at their disposal to coerce companies to act include voting against management at annual general meetings.

Crossman says that while the conversations he has with companies around climate-related issues “are quite advanced”, in other areas the conversations are at an earlier stage. "One area I would highlight in that regard is gender diversity on boards.

"On any issue where we feel companies are not doing well enough, we will start with conversations, but would then move on to shareholder resolutions at the company’s annual general meeting, and after that, to voting against the directors.

"To use the specific example of the gender diversity issue, we would vote against the chair of the nominations committee, as it’s their responsibility. And if action doesn’t happen after that, then we would look to vote against the directors on the board of the company. Of course we would tell them in writing why we are voting a certain way.” 

He says Rathbones tends to partner with other shareholder organisations as this increases the voting and engagement influence they can have. 

Crowl says technological advances are helping the process of engagement, as customised voting tools now exist. She says she also tends to work with industry bodies on these issues, and says another advantage of working with such organisations is they often provide fresh insights into areas that should be of concern to us as sustainable investors and we work on those. 

Narina Mnatsakanian, executive director – sustainability centre at Van Lanschot Kempen, says engagement is becoming easier both as a result of technological changes, but also because more data is available, which provides ammunition for investors to use.

She says: “Engagement is becoming ever more critical in the rapidly changing world. As asset managers move to set climate and nature-related targets, engagement with the largest emitters or companies that have the biggest impacts and dependencies on biodiversity is essential to make sure that portfolios remain on the pathway to Paris alignment or reduce negative impact on nature, for example."

Collaboration is key to achieving our sustainability goals, it is not something financial sector participants compete on.

Mnatsakanian adds: "There are increasingly more platforms and tools available that can be used during engagements, such as Climate Action 100+, Net Zero Company Benchmark, or the Platform Living Wage Financial benchmarks.

"Collaboration is key to achieving our sustainability goals, it is not something financial sector participants compete on. What makes Van Lanschot Kempen unique is the ‘how’ – our approach to integration and stewardship, which is fully embedded throughout the business.”

From a fixed income perspective, Bryn Jones, head of fixed income at Rathbones, says when companies issued bonds for a specifically ESG purpose, initially there may have been a 'greenium' – that is, the bond issuers have been able to get away with paying lower interest rates on green bonds than on regular bonds.

He says some issuers may have taken advantage of this, despite not particularly caring about sustainability issues.

Jones says there is now a greater supply of green bonds coming to market, which, apart from meaning the yields offered are now more attractive, means buyers of green bonds can be more selective, and ensure the capital provided by the bond holders really is being used for the intended purpose. 

Crowl says the other aspect of engagement is reporting back to the investors in her funds to demonstrate how they are engaging with investee companies. She says she does this by preparing a quarterly report, including case studies, for her clients to see.  

david.thorpe@ft.com