The power of engagement

The power of engaging with companies we invest in

It used to be that pension companies and investment managers largely engaged with companies they invest in at their Annual General Meeting. But that’s been changing.  

Nowadays, there’s a more holistic approach to engagement where shareholders aim to influence decisions a company makes and effect positive change. This can be on both company-specific issues or on wider systemic issues that impact whole sectors or economies.  

Yes, the AGM remains a focus. But ongoing engagement, and consideration of non-financial risk – such as operational and reputational risks – as well as financial risk, are now the norm for responsible investors.

Why engagement matters

So, why do we engage?  

There are a number of reasons such as understanding how risks are identified and managed within a business or industry, helping to influence the transition to a low carbon future, and encouraging good governance and employment standards.  All these can ultimately create shareholder value, protect our portfolios from risks and shape a better world to retire into. 

The findings of a report from the United Nations Principles for Responsible Investment (UN PRI) stated that “engagement by investors with companies on environmental, social and governance (ESG) issues can create shareholder value.” ^*  

This conclusion is not new. Pioneering academic research back in 2012 showed successful investor engagement with US companies over a 10-year period was followed by positive abnormal returns averaging +4.4%^**. A follow-up study looked at more than 1,800 collaborative engagements and it also found that successful engagement is linked to increased return. ^*** Last year, another piece of research revealed that engagement is most effective in lowering downside risk when addressing environmental issues, particularly climate change. It showed companies had less environmental incidents after engagement. ^**** 

The UN PRI research found engagement adds value for companies as well as shareholders through the exchange of information and knowledge. This helps companies identify risks, opportunities, gaps, and new trends that can strengthen their ESG strategy.  

A spokesperson for a major oil and gas company told the UN PRI: “I think of ESG investors … as an early warning system. They’re the canary in the coal mine. You know, they’re ahead of everyone else in terms of their thinking about what a problem is and what a risk is. Eventually, governments, civil society and mainstream investors will share the same concerns.”

Engagement in practice

Shareholder engagement covers different ways investors aim to influence companies’ ESG policies and practices. These include voting on shareholder or management proposals, participating in investor letters and statements and direct, or collaborative, dialogue with management. All of which we employ as part of our responsible investment and stewardship approach.

Dialogue with management

Engagement can be ongoing, and direct. In the case of Ocado, we engaged with management to better understand its approach to diversity. Ocado explained how it was supporting more women and ethnic minorities in technology and focusing on making its board more diverse. In our review last year, we were delighted to see the progress Ocado had made. Female representation on its board had increased from 23% to 42% across the period of our engagement.

Collaboration

Collective engagement can be one of the most powerful tools in our armoury. A recent study in Japan found pressure is more effective when multiple investors engage together with the same company on an issue. ^***** We work with our appointed investment managers, other investors, and industry bodies to help drive change.  

For example, we began engaging directly with Amazon in 2023 given our concerns about working conditions for its employees and their inability to join unions. We’ve since collaborated with one of our appointed investment managers to maximise our engagement impact and vote for human rights proposals. As members of the Labour Rights Investor Network, we’re collaborating, too, with a broader range of investors to push for change at Amazon. 

We’re also involved in various industry initiatives to drive systemic change. For example, to tackle workers’ rights at industry level, as well as at specific companies like Amazon, we’ve contributed to the development of the Fair Reward Framework. This provides investors with an assessment of things like companies’ pay scrutiny and reward outcomes to support engagement activity.

Voting

Last year, we cast 79 votes across different topics and resolutions. Voting directly enables us to escalate issues when we come to an impasse in our dialogue with management. Or express our expectations of key companies we invest in. 

As an example, we supported a shareholder resolution asking Nike to detail its supply chain human rights policies. The resolution noted that Nike allegedly owes Cambodian garment workers $1.4m in unpaid wages. We expect companies to identify modern slavery risk across their supply chain and report on any actions taken to mitigate risks.  

We also monitor the engagement activity and voting of our appointed investment managers to ensure it fits with our overarching stewardship priorities. In the case of three of our appointed investment managers alone, this equated to over 4000 engagements globally undertaken in relation to our holdings in 2023. 

You can read more on our many other engagement activities in our latest Responsible Investment & Stewardship report (PDF, 2MB). 

By continuing to focus on engaging with companies we invest in, we can help create more resilient and sustainable businesses, reduce risk in our portfolios. And – ultimately – drive better outcomes for customers. 

Sources

* ‘How ESG Engagement Creates Value for Investors and Companies,’ UN PRI, April 2018 

** Active Ownership, Elroy Dimson, Oğuzhan Karakaş, and Xi Li, October 2012 

***  Local leads, backed by global scale: the drivers of successful engagement, Elroy Dimson, Oğuzhan Karakaş, and Xi Li, September 2017 

**** ESG shareholder engagement and downside risk, Andreas G. F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, Xiao Y. Zhou, October 2023 

***** ‘Does engagement by large asset managers enhance governance of target firms?’, Wataru Hidaka, Naoshi Ikeda, Kotaro Inoue, February 2023, 101932.