Investors and boards of listed companies are neither friends nor foes, but their interest align in differing ways over time, and this requires an array of engagement approaches to achieve desired outcomes.
This is the conclusion of a panel of engagement experts speaking at the Responsible Investment Association Australasia (RIAA) annual conference in Sydney. Michael Jantzi, CEO of Sustainalytics noted that he thinks of engagement as a toolbox of various tools, and that those tools have been deployed in successful ways recently.
“I don’t think one tool of engagement is better than another, they all have their own time and their own place, and you just have to choose the most effective one for the objective you want to achieve, and sometimes, you have to use a series of tools to reach your desired outcome,” Jantzi said. “I don’t take a narrow definition of engagement.”
Jantzi noted several engagement tasks taken globally, including a public letter written to 62 global banks, asking for enhanced disclosure of climate risk aligned to the guidelines developed by the Taskforce for Climate-related Financial Disclosures (TCFD), the non-binding shareholder votes at ExxonMobil and Chevron, as well as strategies such as voting proxies as leading to his conclusion that 2017 has been a “banner year” for responsible investment.
Jantzi pointed to the climate-related resolutions in particular as a sign of success, but still representing a long road ahead.
“Mainstream investors are finally understanding what ESG investors have known for a long time- these are real issues form a risk and opportunity standpoint,” he said. “It means the mega-investors have been on board and so the Vanguards, the BlackRocks of the industry, have supported these resolutions.”
However, Jantzi noted that Vanguard and BlackRock only voted in two of 14 climate-related non-binding resolutions.
“Finally, I just wanted to talk about the more traditional sense of engagement- those one on one meetings or multilateral meetings,” Jantzi said. “I think we’ve seen some exciting moves in that space and I’ll just mention one that I think is significant and one that I think we’ll see more of. The fact is that some of the groups, at least in my perspective, that work in our industry collectively – the RIAAs, the local SIFs, PRI, the Ceres, and so on, quite honestly haven’t gotten along all that well in the past. Organisations that should be working together for the same goal, haven’t worked together for the same goal. There have been lots of reasons for that. One example of that has been the PRI and a group in the US called Ceres, which has done some amazing work on the climate side and so on, and just to put it bluntly in my perspective, they’ have at cross purposes for years. That has changed and I think that’s really meaningful. What we’re seeing now is that PRI and Ceres are now working together on a multi-stakeholder strategy on deforestation, palm oil, looking at large scale agriculture, looking at a lot of things.”
Michael Walsh, CEO of UCA Funds Management, highlighted his fund’s experience in organizing campaigns targeting social justice issues. UCA Funds Management has worked in coalition with investors and stakeholders to engage with ASX-listed payday lenders and goods rental companies over lending policies to financially vulnerable Australians. More recently, UCA Funds Management began organising another campaign to engage with Australia’s big four banks to eliminate the use of its credit cards for the operation of online gambling accounts.
Walsh said the campaigns have gained traction with government and business because the campaigns have a broad coalition of participants and multi-level engagements.
“Even though it can lead to mixed message, engagement needs to be multilevel,” Walsh said. “We’ve had members of our group mention an issue in a meeting with a chair, we’ve mentioned the issues in meetings with a CEO, we’ve had no compunction in engaging directly with people who have ESG of a company and also with IR people. I think hearing the same thing from different sources is an important part of bringing about change.”
“The other thing that we’ve become aware of is that part of the purpose of the engagement is to actually empower people. We’ve have this said to us a couple of times- you’re preaching to the converted. You’re taking to a company about a change that you’d like to see that company do, and they admit you’re preaching to the converted. What we’re doing is that we’re empowering people in that company to bring about change within that company.”
Judith Fox, CEO, of the Australian Shareholders’ Association, pointed out that engaging with companies through the aegis of ASA’s volunteer basis is “incredibly authentic” because they’re harnessing the voice of the retail shareholder. However, when it comes to ESG issues, retail shareholders lag institutional shareholders because of access to ESG research and analysis.
“Around ESG, it’s really challenging for shareholders to get access to the analysis,” she said. “They need things to be digestible and accessible. This is not what they do full time. They invest on the side, they’re having a life. They’re not doing it full time. It’s incredibly hard to get a hold of [ESG research], so retail shareholders are lagging. They have a general sense, but they wouldn’t really, they focus on the financials and they focus on remuneration.”
Pauline Vamos, CEO of Regnan, notes that while many investors conduct what the call engagement, but they are not asking the right questions of companies.
“I come at it a bit differently,” Vamos said. “I’m an ex regulator and an ex compliance professional. …I love the word engagement, and I’m not sure we engage. To me, there must be a purpose for the conversation. There must be a purpose – why are you talking? In that conversation, what are you trying to achieve? And speaking to some corporates, there have been subject questions where they can pull the wool over the person that is asking the questions and they do it with regulators and other all the time. Some companies are very good at this. And first and foremost, people go into engagement not understand the deep history, not really understanding the detail around the organisation.
“… When you are doing a surveillance as a regulator, there is a real skill to the way you develop those questions. You spend months preparing, you have the data, you have the indications, and you have the indications of poor behaviour. And when you go in and you actually run the surveillance, you don’t have the direct question, it’s not a yes or no question, there is a whole plan on how you move to really understanding what’s going on underneath.”
Warwick Peel, co-founder, Future Directors Institute, flagged an issue of concern for Australian-listed investors, noting that while disruption is occurring across a wide swathe of industry sectors globally in areas like artificial intelligence, less than 5% of Australian companies are deploying artificial intelligence now. He asked how investors can work with boards to provide those tools to board directors and executives to make those informed decisions.