Active shareholder engagement
With great power comes great responsibility and, with such large holdings, many fund houses are realising the good they can do as shareholders.
Investing in funds with active shareholder engagement
As well as investing within the responsible themes, the funds below are all involved in active shareholder engagement with the companies held in their portfolios.
Funds in focus
ASI UK Ethical Equity
Their goal is to make a difference – for their clients, society and the wider world.
BMO Responsible Global Equity
Seeks to invest in sustainable companies that are proactively managing their ESG opportunities
Hermes Impact Opportunities
The fund invests in companies globally addressing the unmet needs in society.
What is active shareholder engagement?
As fund houses often hold large percentages of shares in companies, this can give them heavy voting power as shareholders. Active shareholder engagement doesn’t just involve fund houses using their voting power, but also actively working and collaborating with companies to improve any number of issues.
This engagement can happen at numerous points in the relationship and for many different reasons: when a company is hit by a controversy, during wider thematic engagement or even when a company has been screened and identified as needing some changes.
What does this involve?
Typically, the fund houses will screen a broad range of companies before investing, to see which are suitable under their criteria. Once invested, they will then tend to conduct a deeper assessment of their investments with each of their key themes in mind. This will give them a more comprehensive understanding of where each of their investments stands against their aims and against each other.
Once this has been compiled, the fund houses can then present this information to the companies and devise steps to improve their standing, whether that be through reducing carbon emissions or changing approaches to conduct and ethics, depending on where the company requires help. In some instances, the fund houses may also visit some of the company’s sites to get a better understanding of the working environment and how it could be improved.
UK Stewardship Code
Released in 2010, the Stewardship Code was created to improve engagement between investors and companies. This code applies to any firm that manages assets on behalf of shareholders, which includes fund managers.
Within the UK Stewardship Code, there are seven principles which state that institutional investors should:
- publicly disclose their policy on how they will discharge their stewardship responsibilities.
- have a robust policy on managing conflicts of interest in relation to stewardship which should be publicly disclosed.
- monitor their investee companies.
- establish clear guidelines on when and how they will escalate their stewardship activities.
- be willing to act collectively with other investors where appropriate.
- have a clear policy on voting and disclosure of voting activity.
- report periodically on their stewardship and voting activities.
How active shareholder engagement has been used?
What started as single fund managers challenging big companies has now exploded into a movement involving multiple fund houses joining forces to make a real impact. There have been many examples where investors have banded together and achieved very positive change, with just a couple of the notable occasions below.
Climate Action 100+
Set up in late 2017, Climate Action 100+ is a group of investors, with a total of $33tn in assets, who aim to make the world’s largest corporate carbon emitters take action. At the start, the main focus was on oil and gas companies, with shareholders playing a big part in Royal Dutch Shell’s decision to set carbon emission targets.
As time has passed, the focus has broadened to include other sectors and industry in general. This has brought companies like Nestlé and Rolls Royce into the group’s sights, with conversations already taking place to urge these companies to reduce their carbon footprint. Recently, a group brought together by Climate Action 100+ sent a letter to construction companies, laying out the measure they expect to be taken. This included achieving ‘net zero’ carbon emissions by 2050 and setting goals to reach this.
Landmark moves in Oil & Gas
In a landmark move, Royal Dutch Shell announced in 2018 that they would be setting short-term targets to reduce its carbon emissions. This is part of a longer term objective to reduce its Net Carbon Footprint across all of its energy products by 2050. The announcement was the first of its kind within the industry, and was prompted by many conversations with investors. Not only did Climate Action 100+ start a dialogue with Shell, but large investors such as the Church of England and Robeco also pushed for targets to be set.
To take it a step further, the company also announced that these targets would be linked to executive remuneration, subject to shareholder approval. Not too long before the announcement, Shell’s Chief Executive had commented that setting hard targets for carbon emissions was a ‘superfluous exercise’, but it seems that conversations with shareholders showed the importance of Climate Change and the impact that the Oil and Gas sector is having.
Reducing construction waste
A major concern plaguing the construction industry is the amount of waste being produced and consequentially, the volume that is sent to landfill. In fact, a recent report from the Department for Environment, Food & Rural Affairs (DEFRA) showed that construction, demolition and excavation waste makes up 61% of the total UK waste. Many investors have been tackling this issue with companies in the construction sector, and one such investor is Eden Tree, who decided to engage with 11 companies within the sector. They found that many construction companies have set targets for landfill diversion, but very few have set any goals for reducing their volume of waste produced.
Prompted by shareholder engagement, many companies have started to set targets and report on them. For example, British Land and LandSec have both pledged to divert 100% of their waste from landfill, and so far they’ve hit 99% and 100% respectively.
A couple of companies within the sector have introduced waste generation targets, with Taylor Wimpey setting a 10% reduction target for construction waste intensity, and Berkeley Group planning to reduce absolute volumes of construction waste by 10%. With these targets now in place, and more being set all the time, it really shows the positive change that investors can bring about.