One responsible investing technique is known as ‘engagement’. This involves the fund/investment manager influencing a company to try and steer policy and behaviour in an ethical direction.
It can involve a letter, email, or coffee to express concern about an issue. Perhaps asking how the business intends to reduce carbon emissions or deforestation in its supply chain, or asking the executive to tackle a gender-based pay gap. Often, an escalation policy is applied, starting with the first polite contact and ramping up the pressure over time. Subsequent steps may involve collaboration with other investors to increase influence and/or voting against the company management on proposals raised at annual shareholder meetings.
Investment managers and large asset owners such as pension funds claim engagement is a powerful tool and produce lengthy reports listing their many touch points with various companies. However, amongst the many written and spoken words, there seems to be a limited number of major successes or scant detail of concrete impact.
This is why we keep a close eye on the portfolio managers we recommend to our clients. We look at what issues they are engaging on, whether they are setting themselves success goals, and how often they vote against the company management. Often, it seems like it’s a painfully slow process but every now and then, something big happens. This week, there was something big.
A very significant group of investors – including the Church of England Pensions Board and a number of Scandinavian pension funds have ramped up their engagement to the point of legal action against Volkswagen because of its failure to disclose and discuss its anti-climate political lobbying activity.
This is one of the first times large pension investors have contemplated litigation on a climate-related matter in Europe. The investors attempted to include climate lobbying as an agenda item at VW’s 2022 shareholder meeting, but it was vetoed by the company’s management. Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said it was “extremely disappointing to have to turn to the courts to get VW to do the right thing”. “VW is failing to demonstrate that the lobbying undertaken and funded by the company through its industry association memberships is aligned to its own climate goals”. “We are shareholders that want to see the company succeed in the climate transition and in order to protect our rights and those of shareholders we are challenging VWs refusal in the courts.”
Whilst I’m not making any comment on the claims against VW, or its defence, this sort of action sends a much needed signal that investors mean business, that engagement does not have to be a long, slow process. Large pension funds are often pioneers in responsible investment activity because the size of their assets and long term investment timeframe gives them a slightly clearer mandate than managers who look after the funds of individual investors. However, this case could act as a precedent for other managers or collaborative groups of managers to intensify their engagement activity. By doing so, they effectively empower the individual investors – you and me – whose capital is held in their funds.
I work hard to help my clients achieve Sustainable Wealth and whilst I welcome active engagement by investment managers, sometimes institutional investors have to stand up and be counted.
If Sustainable Wealth sounds up your street, you can contact me here: https://www.somersetwm.co.uk/call/
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