RI Europe 2016 panel blog: does investor engagement with companies work?

I broadly argue against, while Edward Mason and Bruce Duguid argue for.

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Investor engagement on climate change is barely noticed by companies; even by the largest producers and users of fossil fuels. It is seen as little more than an occasional irritant.
Hang on: let’s start again. Investor engagement with companies on climate change is really starting to register on the radar screens of boards and senior executives and is on the point of having a substantial impact on corporate behaviour.
These are the two sides of an argument that will be conducted on stage at this week’s RI Europe conference. I’ll be arguing the first position and Edward Mason (of the Church Commissioners for England) and Bruce Duguid (of Hermes EOS) will be responding vigorously and arguing the second.
Too often, as an industry, we adopt a ‘stronger together’ approach that leads us to our overall opinion coalescing around ideas that have short-term attractions – but ultimately turn out to be flawed (cases in point: ‘Long-termism’, ‘ESG’, ‘comparable data’, etc). There are no such risks in our debate this week. With an audience of experienced SRI & CG professionals, the three of us will be arguing with full force against each other and fully testing the strengths and weaknesses of both sides of the debate.
To get warmed up, here are some of the challenges that I will be putting at the door of the emerging consensus that ‘investor engagement on climate change is working’.
In recent months, I have observed that companies (from exposed sectors) are somewhat keener to engage directly with investors on climate change issues than the investors are to respond to this engagement. However, I can’t say that investors are making it easy.
There is a better way.If we want ‘sustainability’ factors to be treated as ‘mainstream’ investment factors, we need to treat these issues in the way ‘mainstream’ investors do. We need to research the issues and their impact on corporate profitability and then buy/sell shares on the back of this research. The magnitude and immediacy of climate change (and the recent experience of highly-exposed sectors) makes the issue entirely ‘investable’ (not in all sectors, not all of the time). This investment approach is already being applied by many investors around the world (‘engagement’ is something of an Anglo-American-Nordic approach. The Germano-Gallic model of SRI appears much more comfortable with the buy/sell objectives. We need to move towards the situation where this is the primary objective of all SRI investors. Engagement without the buy-sell motive has been a useful way of bringing SRI to scale but it will always look niche to the companies being engaged because mainstream investors don’t ‘engage’. It therefore makes sustainability look different from all other investor interest and activity, and alienates Investor Relations Officers (IROs) and the companies that they represent and other investors. Climate change presents a very credible reason to buy and sell stocks and to take overweight and underweight positions in sectors. This is something that many SRI investors already do and really should be at the heart of what all SRI investors aim to do.
Single-issue contact alienates
Just as the overall concept of ‘engagement’ is new (and can be alienating), so ‘single-issue’ engagement is different from the way companies engage with most institutional investors. Most investors are interested in the overall performance and exposures of a company. They deal with all aspects at once. When SRI investors focus on one single issue for engagement and then another issue and then another issue, it is not only inefficient (for everyone) but also alienating to the communicators and opinion-changers within companies.
Collaboration is more trouble than it is worth
‘Mainstream’ investors don’t ‘collaborate’; some SRI investors pride themselves on their ‘collaboration’. I’m not convinced, however, that the arguments for collaboration bear much scrutiny. One
argument is that its more efficient for investors. Really? By the time a collaboration group has been formed and organised and everyone has agreed on the topic and the wording of the letter and agreed whom should be named in what order and who is best positioned to contact the company and who should come to the meeting, sometimes it seems quicker just to pick up the phone to the company. Another argument is that its more efficient for companies to speak to numerous investors at once. Does it? Can’t companies use webcast/webinar technology for this? No collaboration needed, just a list of email addresses and some fibre-optic cable. The last major suggestion is that engagement brings more impact on companies because of the force of assets applied.
Well…anyone who has ever been on the receiving end of any campaign will know that 10 uncoordinated messages on a similar topic has more impact than 100 identically-worded messages.
In any case, a half-decent IRO will look straight past the claimed $X-illion of investor assets and ask themselves: are any of our largest investors on the list? Are there any active investors who might buy/sell the stock (or are they just passive investors who will hold it anyway)? They will identify the opportunity in responding or not, and act accordingly. The ‘X trillion’ of assets is rarely exciting or scary. The ‘Y million’ of potential buyers / sellers certainly can be. So, who’s engaging whom?
As I noted above, ‘engagement’ has served a useful purpose and will continue to do so. However, before investing too much more time in it, we need to ask at whom is it really directed? With which audiences does it have most impact?At other investors?
Yes. Engagement has certainly been (and will continue to be) effective here. It has involved many more investors in SRI than screening would ever have done. It has given newcomers an extremely low-risk way of exploring the area.
At the media and the wider civil society debate?
Certainly. There’s nothing more that the media love than a bit of money-on-money conflict, and they are usually willing to cover investor disquiet with corporate behaviour.
At investor clients?
Again, there’s been a win. The message that ‘your invested money can target direct change in corporate practice’ is simple to communicate and therefore an effective way of engaging pension fund trustees and retail investors.
At companies?
Hmmm….I remain to be convinced.
Engagement can certainly be effective with various audiences and it remains a useful arrow in the SRI investor’s quiver. However, I think we make a mistake if we see it as the endgame of investor activity with companies; particularly when it comes to climate change where ‘energy transition’ is the endgame, and where for that to occur efficiently, we need to see rigorously-research and robustly-justified capital transition. Come and join the debate!

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