Engagement is often framed in adversarial terms, with investors making demands of companies with the threat of escalation explicitly or implicitly in the background. But that is not the whole story – more collaborative approaches are pursued, albeit often more privately.
There was a rare public example of this last month, when German giant Bayer issued a joint statement with a €4.6 trillion investor group led by Generali Insurance Asset Management on the fruits of a “bilateral dialogue” between the sides that had been going on since 2021.
Generali Investments’ engagement lead manager, François Humbert, hopes that such communications and a more collaborative approach to engagement generally becomes more common and more public.
The Leverkusen-based pharma and life sciences firm was perhaps an unlikely candidate to take such a step. Even Humbert acknowledges that Bayer is “considered by many as a laggard” when it comes to ESG.
Through a more collaborative spirit, however, an “initial confrontational relationship” was able to be transformed into a “partnership one” – as demonstrated by the statement.
Humbert also currently chairs Climate Action 100+, the multi-trillion-dollar investor engagement initiative targeting the world’s biggest carbon emitters, including Bayer.
He tells Responsible Investor that the statement with Bayer was almost six months in the making. Crafting this kind of joint statement, he says, is a “handful” and “takes a lot of effort” – but is worth it “because it’s the only way you can demonstrate your additionality”.
“If you read the statement closely you will see success being attributed to different investors, with us as lead investor,” he continues.
Bayer also attributed its improved ESG ratings over the past couple of years to this “bilateral dialogue”.
Not all investors were as comfortable to be named alongside Bayer. Total assets under management linked to the engagement effort were roughly double the amount accounted for by the three investors named in the statement. The other two were Union Investment and Northern Trust Asset Management.
Humbert says Generali Investments is not shying away from difficult companies. “We’re talking to and about the ‘bad students’, and how we are working with them and demonstrating how we are helping them.”
Additionality not intentionality
Generali Investments has started using the term “engagement alpha” to capture the additionality created through its stewardship efforts. “We think there is a parallel to be drawn with portfolio management,” Humbert says. “A manager that does not create alpha is not valued.”
Yet many in the market are focusing on what Humbert calls “beta engagement” – which, he says, “will only be demonstrating intentionality”.
Without evidence of additionality – through, for example, a joint statement – Humbert warns that there can be the risk of “greenwashing”.
“There is no incentive to do more than just send a letter, for example, to show intentionality,” he says. “Otherwise, you send a thousand letters to companies and then if you identify 10 that did what you asked, you can claim, ‘I asked this company to move’.”
Regulators are becoming alive to this type of greenwash, Humbert notes.
Last year, a joint report by the Banque de France and French financial regulator AMF revealed that one financial institution that claimed to have engaged 189 coal firms “counted the mere sending of emails, even those remaining without a reply, as an engagement activity”.
And it is not just regulators – clients are also demanding to see the fruits of engagement, Humbert adds.
At the same time, concerns have been expressed that actions such as issuing a joint statement could lead to an investor being unwittingly used by a corporation. Humbert agrees that this is a risk, but only if the company has been given a “blank cheque”.
“What we are saying here is that ‘X’ is precisely good, we expect more on ‘Y’ etc,” he says. “This is best practice for this kind of joint statement.”
To achieve this level of precision, an investor needs to bring value and, importantly, for the company to be able to clearly identify that added value. Otherwise, Humbert says, “you’ll end up with a generic statement about greater understanding between a company and its investors”.
“Being precise helps to frame things, where there is agreement and where either side is not satisfied still,” he says.
But could closer collaboration with companies impinge on critical distance? Humbert says the key to maintaining this is “part of the role of a negotiator”, and that being a good negotiator means having “tactical empathy” – a term he picked up from a course in negotiation.
“It’s a mindset,” he says. “Negotiation starts with a common objective. As soon as you find a common objective, you can focus on that common goal, and it helps to create this empathy. You can understand that you have different perspectives but still be focused on the same goal.”
For Humbert, the role of engager is very much in the mould of a negotiator. “ESG analysts and financial analysts are analysts,” he says. “They ask questions, and then they make decisions based on them. But as engagement managers, we take their analyses and bring that to the company, and we try to convince them through negotiation. It’s a completely different role.”
Negotiation goes both ways too, including with Generali Investments’ own ESG analysts, who set the objectives and metrics used in engagements.
“Sometimes the ESG analyst will have an expectation which may not be realistic,” says Humbert. “We have to negotiate or change the wording because we negotiate expectations, so that the counterpart at Bayer can go internally to their teams with it.”
But collaborative engagement requires sensitivity. According to Humbert, the investors that signed up to the Bayer work entered into “a gentleman’s agreement” beforehand on the “terms of reference” and “how things would proceed”.
To emphasise the importance of this, Humbert cites a case when good dialogue with a company was disrupted by the aggressive tone of another investor. “It completely changed the approach of the issuer, who became defensive,” he says.
The upshot was two months of progress lost. “We had to call the investor in question and remind them of the terms of reference.”