"Engagement is for the next tier of companies, where it is a question of business practice. That is about what the company does and how it does it. There would be two or three engagements from us a year, and what we want to see is improvement each time, and we quantify this with our own ESG scores.
"We have found that about 30 per cent have seen no change, and 70 per cent have improved. Our investment team engages with the company management but also with the board. This doesn’t mean each engagement leads to us getting what we want, but its improvement over time.”
Sandra Crowl, stewardship director at Carmignac, says practices that would mean a company scores badly in terms of ESG is also likely to be a sign that the company is run less than well, and that has implications for the financial returns a company can achieve.
It is for this reason she says investment houses “have a duty” to engage with investee companies. She identifies high levels of staff turnover and lack of action on carbon emissions as two particular red flags.
She says: “It’s a pretty structured approach; if we score a company low on ESG, we want to know why. We do our own scoring but use external ratings agencies as a guide as well. Governance has been 90 per cent of the decision for most companies, but the E and the S considerations are becoming rapidly more important.”
Yuko Takano, portfolio manager at Newton Investment Management, says she and her team generally disagree with company management about 30 per cent of the time, and vote accordingly.
She says dedicated engagement professionals and the investment managers, such as herself, tend to also want to be involved. She says the engagement is more effective when the actual fund manager – the person with “skin in the game” – is properly part of the investment process, and not just a bolt-on.
James Budden, director of marketing and distribution at Baillie Gifford, says that active fund management companies are likely to be more able to engage with investee companies because they have the ability to sell the shares of companies they believe are not making progress, while index funds must own them.
But he adds that “it is also a question of time. At Baillie Gifford we are invested in 300 or so companies across the funds, but a big index provider will be invested in close to 3,000, and that makes meaningful engagement much harder and creates something closer to box ticking”.
Angus Parker, who runs the HSBC Global Equity Climate Change fund, says: “Engagement with portfolio holdings is an essential ingredient in exercising fiduciary duty. As well as interactions initiated by individual portfolio managers or analysts in support of a particular investment, engagements can also form part of firm-wide programmes to promote responsible investment outcomes.
