Finance

Engagement isn’t just for finance giants

“And we also engage…” This sentence often concludes an interview with managers specializing in sustainable finance. As if to signify that these managers communicate with the companies in which they invest, and – icing on the cake – influence them. Shareholder engagement is fashionable, asserting that it is not expensive and it is good for the image. The operation runs greenwashing when it is limited to a brief general conversation with the managers of a company, without the content or the consequences of this exchange being documented. But financial actors have specialized in shareholder engagement, have developed it and can show its interest for the performance of their investments as well as for the companies concerned.

It’s fine to start a dialogue with a company, but it still has to respond to it, and ideally then take into account what has been transmitted to it. To overcome this obstacle, one way is to arrive with a diagnosis and proposals. “We show the companies in which we are invested the differences between certain aspects of their activity and those of other companies, we draw their attention to the dilemmas they must overcome, and we formulate proposals”, summarizes Melchior de Muralt, one of the leaders of Pury Pictet Turrettini (PPT), a management company based in Geneva and Zurich, which has been practicing engagement since 2006.

This very process-, value-chain- and business-model-oriented approach opens the door for companies in almost all cases, for a first meeting, assures the Geneva financier, who co-created BlueOrchard, a pioneer impact finance, in the early 2000s. PPT publishes reports detailing precisely the points discussed with the companies in its portfolio, the recommendations made and the way in which they were applied or not.

Sharing best practices

For example, shortcomings identified at Dassault Systèmes relate to the lack of specific indicators and objectives concerning employee diversity. Or the fact that the extra-financial data published is only comparable with that of the previous year. At Philips, active in particular in medical equipment, PPT recommended improving the accessibility of its products and access to health in fragile economies.

“We identify best practices among the many companies we meet as managers and we help them share them,” continues Dominique Habegger, sustainability manager at PPT. We come back to an essential role of the financial actor, intermediation. Without imposing anything, which allows small players like PPT (6.5 billion francs under management in total) to be listened to.

The company has also developed a methodology to assess the communication of companies on their progress, the equivalent of a procedure for portfolio companies. “The goal is to show that something positive has happened that would not have happened otherwise, knowing that the impact often materializes after two or three years”, continue Melchior de Muralt and Dominique Habegger.

PPT, which also indicates precisely how it voted at general meetings, also aims to facilitate links between portfolio companies and foundations, development agencies or even other companies. Between October 2006 and the end of January 2022, its European fund outperformed its benchmark index by 41%.

And when it gets stuck…

A constant dialogue, a true partnership with the management of the company are the conditions for a fruitful engagement, according to Andy Ford, head of sustainable investments at Aviva Investors. The asset management division of the English insurer (325 billion francs under management) has maintained such a dialogue with BP for years, either directly – “we spoke with the management about twenty times last year, specifies Andy Ford, or via the Climate Action 100+”, an initiative that targets big polluters.

The strategy of the English oil group often goes in the direction of the requests formulated by Aviva Investors, continues Andy Ford: “BP lowered its forecasts for the price of raw materials last year, which we asked of it; remuneration is more aligned with the company’s mission and a growing share of its investments is oriented towards the energy transition.”

Aviva’s approach is fruitful “certainly because we are a major shareholder, and also because we act in concert with other shareholders”. An investor’s size doesn’t guarantee they’ll be listened to, however. Still in the energy sector, Aviva wants Shell to lower its gross CO2 emissions, while the Anglo-Dutch group focuses on its carbon intensity (its emissions in relation to its revenues) and prefers to offset its emissions, via carbon credits or tree planting. Faced with such differences, is Aviva tempted to leave Shell? “We prefer to continue talking to them. Depriving a company of capital would penalize its transition,” replies Andy Ford.

Go out, with a bang

Divestment is nevertheless part of the solutions. The asset manager launched a program in February 2021 to push the 30 largest CO2 emitters to reach net zero by 2040. “If we don’t see answers, we have publicly announced that we will sell all our positions. These 30 companies are responsible for a third of global emissions, so even if we achieve 50% success, the environmental impact will be significant and Aviva itself would be taking a big step towards its commitment to be net zero. in 2030”, concludes our interlocutor, who also underlines the power that lenders have over a company.

Shareholder engagement is not common enough, although it can be effective, regrets Falko Paetzold, who heads the University of Zurich’s research center on sustainability: “Engagement has the greatest impact when an investor buys shares of a company with unsustainable practices and pushes for them to improve their practices.”

Convergence of interests

Commitment is not reserved for major shareholders in a company, continues the researcher, who has devoted his doctoral work to this theme: “The size of the investment is not a determining factor in influencing companies, elsewhere they often do not know what part of their capital is held by such and such an investor. The key elements are the interest of the arguments presented and above all the management’s openness to dialogue. Leaders are more and more willing to learn from their investors, they are aware that they do not have the science infused.

A convergence of interests is increasingly visible, continues Falko Paetzold: “Shareholders may have done research or used the lessons of other companies in which they are invested to suggest ways of improvement. In that sense, they do the same job as a director who sits on different boards.”


The different forms of commitment

Buzzword par excellence in sustainable finance, commitment (which can be pronounced in English or French) can take different forms. Most often, fund managers delegate it to specialists such as the Ethos Foundation in Switzerland or the English from Hermès, who vote and publish an end-of-year report. Another possibility, collaborative engagement consists of bringing together a large number of shareholders to influence major issues. This is what the Climate Action 100+ does, for example, an initiative that wants to encourage companies that emit a lot of CO2 to adopt climate measures. There is still direct engagement, which basically consists of speaking with the management of a company.


The threat does not work

“Do as I ask or we will sell your stock.” The threat of disengagement might be the most basic form of engagement. It is also an argument often heard from the mouths of sustainable managers wishing to appear very involved in the life of the companies placed in their portfolio. Except that this strategy hardly works in reality. It is based on two ideas. On the one hand, that mass sales of a share would cause its decline, which would give a bad image to the company concerned. On the other hand, that the latter would have to bear higher financing costs.

In practice, for the cost of capital to increase by more than 1%, 80% of the capital likely to be invested would have to be held by impact shareholders, shows a recent study* by two American researchers, from Stanford and from the University of Pennsylvania. And this is their most optimistic estimate. According to them, a more effective strategy is on the contrary to invest and obtain changes from within the company, for example by forming a majority to replace the management in this case, which requires the support of 50% of the shareholders. .

“The threat to divest usually doesn’t impact the stock price, but it can signal to the company which themes are important to investors,” adds Falko Paetzold of the University of Zurich.

*The Impact of Impact Investing, Jonathan B. Berk and Jules H. van Binsbergen, October 25, 2021

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