Engaging with companies is seen as a key part of the responsible investing toolkit – but with a growing cohort of asset managers touting their ESG engagement credentials, questions are inevitably being asked about the effectiveness of some of these efforts.
“Clients are expecting a better understanding of impacts and outcomes,” says Greta Fearman, senior responsible investment officer at Actiam.
The problem, as she notes, is that measuring the outcome of engagements is challenging, even for the most sustainability-minded investors.
As Barclays noted in a recent review of the ESG and stewardship reporting of a variety of asset managers: “There appears to be no consensus on how to report on whether engagement had resulted in a favourable outcome, or how to present when engagement had resulted in escalation.”
For Fearman, the key to understanding how engagement works, as well as to making it more impactful, is more effective use of data.
“It helps make engagements more concrete and we can track progress more easily,” she says. “We know the direction we want to go in and now we have to invest in being able to show that. It’s definitely the direction the market and clients want. And it would be more meaningful.”
In this context, Fearman highlights the potential of alternative data and tech. “We want to use more satellite data in our engagements as there are loads of innovations in this space,” she says.
“Investors typically want to use data that is comparable across an entire index, but some of the alternative data providers provide deeper insights for specific sectors. These sources are useful to get better insights on certain sustainability topics, like companies’ impacts on the oceans.”
Actiam is currently utilising satellite data from Satelligence to identify deforestation incidents linked to companies’ supply chains.
“Even if it’s a Nestle or a retail company, we have information that shows somewhere in their supply chain they’re sourcing palm oil from Indonesia or Malaysia and that there are deforestation incidents occurring,” says Fearman.
She is currently in discussions with around 15 companies – including consumer brands and retailers – about their management of deforestation incidents and their work with supply chains to address them.
As scrutiny of engagement efforts increases, Fearman believes investors will hold companies to higher standards and be stricter on time horizons, as well as on imposing limits on engagements. “We’re going to be forced to show outcomes and when we can’t show good ones, we’re going to need to take a next step,” she says. “Logically, that next step will often be divestment.”
She gives the example of Actiam’s engagement with Total Energies on the subject of the controversial East African Crude Oil Pipeline (EACOP) project that will run through a national park in Uganda. For the investor, it posed a series of biodiversity, climate and human rights issues. Total was open to discussion but Actiam was ultimately not satisfied that the energy giant was doing enough to mitigate the potential impacts of the project.
“We investigated third-party consultant reviews of the potential for Total to increase the cost of the project slightly and decrease the impact on biodiversity by using certain techniques,” says Fearman. “And they weren’t willing to make those changes even though they’ve used these techniques in different projects in developed markets. They said they were doing the best thing that suits the area.”
Actiam concluded that Total was prioritising low costs above sustainability. “For us it’s the opposite,” says Fearman.
Asked for comment on Actiam’s allegations, Total said that preserving local biodiversity “is an imperative necessity” for the company. In relation to the EACOP, a spokesperson pointed to various avoidance and mitigation measures, including plans to return the pipeline corridor to its natural state after construction, the project’s limited footprint in the Murchison Falls Park, and Total’s support for a programme to reintroduce species such as the black rhino.
Further details of Total’s biodiversity strategy and how this relates to the EACOP project are available in the group’s March sustainability report.
Actiam, however, was unconvinced. The asset manager took the decision to divest from Total in March.
“You need to decide when enough is enough,” says Fearman. “You’re not going to just continue on forever – there needs to be a goal. They need to know there is a consequence and we can show those consequences in different ways. And I think divestment has a place in signalling that.”
She also notes that the potential for engagement is a factor in Actiam’s initial investment decisions. “A lot of investors say don’t exclude because it takes away your engagement potential,” she says, “but you need to focus your energy and resources and do high-quality engagements. We choose to invest in the companies that we think have the capacity to become leaders.”
Actiam is also prepared to look beyond individual companies when it comes to engagement, Fearman adds. “I think we hear a lot of excuses from companies. A struggle we’re really seeing is that whatever the sector, the company or the issue, it seems the default is to point responsibility to the next line in the value chain.”
The asset manager is trying to address this by engaging the whole value chain. “It is really useful to do as you hear from different players, and you can challenge them back,” Fearman says.