ESG Engagement is not limited to Proxy Voting policy!
Are you a responsible investor willing to influence the ESG performance of a company you invested in ? Then “Engagement” is probably one of the tools you are using to try to achieve this end.
But the fact is that, today, Engagement has little or no impact on companies’ ESG performance. In most of the cases, the so-called “Engagement” is unfortunately limited to the definition of the Proxy voting policy of the professional investor for the shareholders General Meeting. This is so true that the communication of Asset Managers in their Engagement Reports usually only provides, as key indicators, the respective percentage of votes: FOR, AGAINST, ABSTAIN…
By the way, and as an example, according to a study published by Majority Action in 2019, the 25 largest Asset Managers, during the 2019 general meeting of the Energy and Utilities sector, didn’t systematically vote for the climate resolutions…
Anyway, voting against a company resolution is not truly engaging with a company on its ESG performance: It’s too late. A responsible investor should engage early with companies in its portfolio, in order to have a chance to really influence the policies and operations of companies—for the benefit of us all.
Better Engage on ESG performance, through impact
To go beyond Proxy Voting policies will require to start a true Engagement process through a mid/long-term discussion between interested parties, and build on trust.
And, as a Responsible Investor, looking at the ESG impact performance can offer you several, and non-exclusive, approaches to improve your engagement process—and here is some of them.
1. Identify ESG weaknesses and strengths
Identify a company’s ESG weaknesses and strengths, using ESG impact areas rating, and then target your engagement effort around ESG impact themes: Gender Equality ? Energy consumption ? Tax evasion ? etc.
2. Track ESG progress and trends
Using the historical part of the available ESG impact ratings of a company, track its progress on the several ESG topics of interest identified. Does the ratio of hazardous waste increased ? The proportion of women in management decrease ? These kind of signals can trigger your discussion with the company, based on facts.
3. Benchmark the ESG performance amongst peers
Benchmarking the position of the company ESG impact performance, relatively to its peers within sub-industries, geographies, and other relevant dimensions, will provide you with interesting insights. You could then focus, for instance, your Engagement process on the companies with the greater room for improvement, or foster thematic Engagement on specific developping countries—depending on your Engagement objectives, and Core Values.
4. Converge on quantitative performance indicators
During the discussion phase with a company, within the engagement process, you will be able to propose, discuss, and engage with the company on the improvement of quantitative and positive impact indicators — e.g. percentage of women in management, percentage of renewable in the energy mix, etc.—i.e. you will be able to track facts, and not intentions.
An Engagement process, obvisouly, takes time. But, ultimately, if the engagement fails, after several cycles, and the company doesn’t demonstrate its willingness to improve its ESG performance—based on quantitifed results—, then, as a Responsible Investor, you should take responsibility for your investment, and also for your end-customer—which might have selected you for your strong ESG values—, and thus divest, from the company, probably progressively, in order to demonstrate your convictions, and allow the company to alter its negative ESG strategy during the process.
ESG Engagement: a responsible investor’s duty
At IMPACTIN, we think that the current situation regarding Engagement—focused on poorly efficient Proxy Voting policy—is not a fatality, and that another approach is possible.
The ESG impact ratings, available today, empower the Responsible Investors, and provide them with the right tools to better select the more relevant companies in their portfolio, and truly engage on the improvement of specific, quantitative, measurable indicators of positive impact.
As Responsible Investors, you have the power to redirect the investment flows to have a real positive impact on our planet and society. Money, through finance, is a great lever, maybe the greater of all—and remember Archimedes’ saying : “Give me a lever long enough and a place to stand and I will move the earth“. The transition towards a more suistanable economy thus lies in your hands.
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