Engagement – Is the struggle real?

To engage or not to engage, that is the question. As asset managers, we have long been debating as to whether ESG engagements with companies are beneficial and if the outcomes of engagements are what we initially intended them to be. As active managers, we advocate that engagement is part and parcel of our investment philosophy. Yet, there has been some headwind from critics in the ESG community, indicating that engagement is a sort of greenwashing mechanism, where asset managers justify their investments in controversial companies by argumentatively falling back on their engagement strategy.  

I understand this predicament. Simply stating that an asset manager is in a continuous engagement process with a company could denote an easy way to remain invested in a controversial company rather than demanding immediate action from a company with divestment as an ultimate escalation mechanism. However, in a recent ESG survey[1] that we conducted, “70% of respondents chose engagement as the most useful instrument to address climate change in an investment approach”, whereas divestment, interestingly, was considered to be the least useful instrument. Here are some of my thoughts on this matter as I try to paint a picture on the challenges and successes of engagement.

The challenges:

The struggle to have meaningful engagements are real and the players responsible for creating an environment that supports productive engagements are not only investors but also companies themselves, so it goes both ways. Engagements can take many forms and various triggers within the investment process can lead to engagements: addressing ESG controversies, solving questions that arise during the proxy voting process, gaining insights through thematic engagement or even just general engagement on, for example, transparency issues. Where do we see the challenges from an asset manager’s lens?

Responsiveness: The accessibility can strongly depend on the company and the relationship that we as asset managers have built with the company. Generally, we find that for smaller sized companies we have a higher response rate. This, however, also hinges on the company’s resources dedicated to ESG-related engagements.

Disclosure:  Larger companies tend to have a higher degree of transparency and disclosure on ESG information, as they usually have dedicated teams for producing ESG related information. Smaller companies struggle with this as they are constrained by resources, knowledge and by the sheer amount of requested information not only from investors but also ESG rating providers[2].

Time frame: This is where I believe lies the biggest struggle and where the debate of “engagement-washing” stems from. The engagement process is by itself a lengthy process from the start of the engagement where the initial contact with the company begins, to receiving a response and to even finally (if at all) having a productive exchange with the company. Sometimes due to a serious controversy, where the market has reacted quickly to a scandal, companies could engage with investors on short notice to clarify situations. However, if an issue is deemed not to be sensitive, it could be days or even months before a response is given. So the key question is: if we do not receive information that satisfy us asset managers in a timely manner, when do we call it quits? This is where pre-defined engagement milestones and strategies that involves assessing ESG risk are very important for every asset manager.

The successes:

Despite the difficulties, it is not all grey in the world of engagement. We have found that engagement can be a highly effective tool for positive change and the more we engage and push a company, the more responsive they become. I believe that engagement does not only help investors gain important information but that it also helps companies to understand what type of information is relevant to investors at a given point in time.

There are some actions that investors can take which can increase the chance of a successful engagement. For engagements to be fruitful and productive, investors should provide companies with information in advance on the questions or qualms that they have. In this way, companies are enabled to pre-empt and prepare themselves, get input from internal experts on the matter and, ultimately, avoid a crossfire situation in which a company is being bombarded with questions during engagement meetings or calls. I have found that companies are usually thankful for the heads-up. Further, in cases where companies do not adequately respond to engagement queries, persistence can be the answer. For example, as an asset manager with an active strategy, we had contacted a financial services company based in Asia a couple of times before receiving a response regarding an ESG controversy. After numerous correspondences with them, we then received a sufficient response to provide us with details to measure the ESG risk of being invested in the company.

We also see that our engagements can make direct changes. In a different example, we provided a small sized European based software company with our view on their remuneration structure and their lack of certain ESG-related remuneration metrics. The company then brought it up for discussion in their board and implemented certain new remuneration aspects.

In short, there is no one size fits all recipe to ensure that engagements are fruitful. But what can be done is that on one hand, investors 1) set realistic milestones and 2) have clear expectations of its invested companies and on the other hand, companies 1) are responsive to investor engagements and 2) remain open to clear and transparent communication. Hopefully this could help ease the struggles of engagement.

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Dr Rupini Deepa Rajagopalan is Head of ESG Office at Berenberg Wealth and Asset Management, based in Frankfurt, Germany. She is an Instructor and Chair of the Content Oversight Committee for StePs, the Association of Stewardship Professionals and the Chair of the Sustainable Disclosures group for the DVFA  Sustainability and Governance Commission.

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