The importance of considering values in sustainable finance

How Shareholders for Change practice “shareholder criticism”

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Responsible Resolutions: This is the latest article in a series from sustainable finance practitioners about their hopes for the New Year.

Close your eyes for a moment and think about what is the most important and valuable thing in your life… if the answer is not "money" read on.

If the answer is "money" … read on more than ever. For once, let us not start the discussion on the subject of investing money from the point of view of "money", but from the point of view of what is really important to us.

It is absolutely welcome that for some years now, more and more asset managers and asset owners from the "traditional" financial market have been considering sustainability in their investment activities. What is behind this development? 

In addition to many possible motivations, such as reputation, marketing, increasing regulatory pressure, and in some cases rising customer demand, the recognition or conviction of the financial materiality of sustainability to an investment is one of the main driving forces behind sustainable finance. First of all – this is neither bad nor reprehensible, but it is incomplete if it is limited to this.

Conversely, this approach means that an investor only deals with the sustainability of an investment if it is financially material. Whether there are other sustainability aspects of the investment that are more important for sustainable development – and for the investor’s own values – is irrelevant. 

Many asset managers and other fiduciaries may argue that this is not part of their fiduciary duty. They are only just beginning to think that integrating financially material ESG factors into their investment policy is part of their fiduciary duty. 

But it is precisely here, that this ‘abridged’ investment behaviour becomes an obvious hurdle from the perspective of a positive contribution to sustainable development and with regard to one's own values and that of clients. 

For how can an investment which is contrary to one's own values or against what is important for you, e.g. health, peace, the future of one's own children, the environment etc., be in the long-term interest of any investor?

It can no longer be denied that there is a growing public interest in the actual contribution of asset managers and asset owners to sustainable development. 

This could – at the very least – result in damage to credibility and reputation if there are no satisfactory answers to this question.

However, this is not about creating any kind of sustainability footprint, just because it is currently fashionable. 

Rather, clear and honest goals must be set for the investment to support one's own values and sustainable development. In other words, the consideration of ESG aspects should not only be used to improve the risk/return ratio of an investment, but a general consideration of sustainability should be used to actively contribute to a positive impact.

To actively promote sustainable development, SfC not only pursues the concept of ‘shareholder activism’ but also ‘shareholder criticism’

The Shareholders for Change (SfC) network shows that this is not only desirable in theory but can be successfully applied in practice.

SfC is a network for active ownership through engagement dedicated to European institutional investors, like the German Catholic Church bank, Bank für Kirche und Caritas eG (BKC). It was launched in December 2017 and currently has 11 members, managing a total of €25bn. 

Contrary to what the name suggests, engagement activities are not only carried out as shareholders, but also explicitly as bond investors and are aimed at other financial market players such as mutual funds – and political institutions or associations. 

SfC has set itself the task of supporting sustainable development through their engagement activities and thus contribute to helping to develop sustainable financial markets. As a result, the range of possible sustainability topics for engagement is broad.

This is reflected in the 17 sustainability themes listed in the SfC Charter of Values. They include, for example, human rights, disarmament, animal protection, biodiversity, tax justice and transparent reporting on ESG issues. To enhance the effectiveness of its engagement, the network has identified three main areas initially: climate protection, tax justice and human (including labour) rights.

To actively promote sustainable development, SfC not only pursues the concept of “shareholder activism” but also “shareholder criticism”. 

Both concepts focus on the goal of improving the sustainability impact of the investment target, e.g. a company. The difference between the two concepts is that in the case of shareholder activism, engagement activities are carried out to achieve an improved risk/return profile of the investment by improving the sustainability impact of the company. 

This clearly defined escalation mechanism is a central prerequisite for credible and effective engagement.

In this case, the engagement activities are with companies where either an investment has already been made or where there is an intention to invest. 

By contrast, shareholder criticism does not include any risk/return aspects. An engagement activity is carried out here solely because of the sustainability impact, even in cases where no investment has been made to date and there is no intention to invest. 

SfC even allow themselves the possibility of making a symbolic investment in a company for the sole purpose of shareholder criticism, e.g. by buying just one share. The aim of this approach is to make an intervention at the annual general meeting or to have the possibility of bringing a shareholder resolution.

Irrespective of the engagement concept, if the engagement activity with the company does not bring about the desired improvement, an escalation in the engagement will take place.

In the opinion of SfC, this clearly defined escalation mechanism is a central prerequisite for credible and effective engagement.

The maximum escalation is for the shares or bonds of the company to be sold, not further increased or not bought at all. Another effective escalation is public shaming, i.e. publicly highlighting the unsatisfactory results of an engagement via a press report, for example.

An example of this is Rheinmetall case (see RI coverage). The focus of criticism of the defence company Rheinmetall was the export of bombs via its Italian subsidiary RWM Italia SpA to Saudi Arabia, which, according to NGO research, used them against the civilian population in the Yemen war.

These grave human rights violations prompted the two SfC members, Bank für Kirche and Caritas and Fondazione Finanza Etica, to intervene on behalf of SfC at Rheinmetall's annual general meetings in both 2018 and 2019.

Since no SfC member held Rheinmetall shares, a single share was purchased via the SfC network in order to have speaking rights at the AGM. Since Rheinmetall has shown no willingness to discuss the points raised, SfC has drawn attention in various media to Rheinmetall's lethal bomb export practice.

All the SfC's activities are described in its annual report

Tommy Piemonte is Head of Sustainable Investment Research at Bank für Kirche und Caritas eG, a catholic church Bank based in Paderborn. Prior to joining the Bank für Kirche und Caritas, Tommy Piemonte was Head of the sustainability rating agency at imug in Hanover, research and sales network partner of Vigeo Eiris.