Achieving impact ‘requires 10 times more effort than standard engagement’

Standard engagement by investors will not be enough to drive real change at companies, according to Generali Investment’s lead engagement manager, François Humbert.

Defining “standard engagement” as “simply” raising awareness of a problem to an issuer, he told Responsible Investor: “To add value, to create trust, to negotiate and find something that is realistic for the company to do you need 10 times the effort.”

Humbert is a member of the Principles for Responsible Investment’s (PRI) stewardship advisory committee and was also recently appointed to the steering committee of Climate Action 100+, the multi-trillion-dollar investor engagement initiative targeting the world’s largest polluters.

His firm currently leads engagement with Czech energy firm ČEZ Group and PGE, Poland’s majority state-owned utility.

Credibility is key when it comes to engagement and that is built upon investors bringing “a lot of expertise” to the table, Humbert said.

But that expertise is not not always evident. Humbert told RI of conversations he’d had with an unnamed issuer who thought the “level of expertise and knowledge of some investors needs to be improved”.

While many investors do have the necessary expertise, Humbert said some others “just ask companies to align with a 1.5C pathway”.

Part of the issue is a “culture of numbers”, he added. “I feel that one reason why engagement is not moving as fast as it could is because investors are engaging a lot of companies and not focusing their efforts on few companies and few topics.”

Focusing on “quality over quantity” allows for a greater understanding of the limitations faced by companies, Humbert explained.

Such quality engagement, however, also requires in-depth knowledge, which in some cases is not readily available. For instance, Humbert told RI that no one was able to provide him with a “detailed, robust and quantitative answer” to the question of what being 1.5C-aligned would mean for an oil and gas firm when it comes to capital expenditure in the short term.

It is a question that Generali Investments is actively working on now.

Exxon example

An engagement campaign that was not lacking in sophistication or effort was that conducted by Engine No.1 at Exxon last year, which saw the US activist fund secure three positions on the US oil major’s board for its nominees.

Humbert described that campaign as a “turning point”. “From now on, I believe that, either we start working together with issuers to define, in a collaborative way, the way forward on how investors can be more involved in board candidate profiles’ definition and selection, or more and more issuers may face a similar situation at their AGM,” he said.

One idea raised by Humbert to support this is the creation of a global database of climate-competent directors by investors that companies could draw from.

“For me this is the real role of shareholders, to define profiles of boards,” he said.

The database could be divided into regions and sectors, but would allow investors to offer firms a pre-approved pool to pick from.

Humbert suggested that a lack of focus on boards could be another reason for the lack of progress on climate. He also suggested that it could be a “much more efficient” avenue than, say, filing shareholder proposals.

For instance, if a company is compelled to act because of a resolution, there is a danger that it will merely go through the motions – a criticism that was levied at Exxon’s 2018 climate report.

“Imagine a resolution on 1.5C-aligned reporting would have been approved – relevant issuers would have approached it with a compliance mindset, they would have done the least possible to be compliant from a legal point of view,” he said.

“If you go with a collaborative approach, you achieve much more, in my opinion.”

The idea for a director pool has been discussed by Humbert within a Say on Climate working group in France and he said that it is “starting to gain traction more widely”.