Once the initial due diligence has been carried out and the ESG investment made, the next challenge is to ensure that the investments made continue to behave in the way that enable them to demonstrate the desired ESG criteria in the first place.
Stewardship can range from being vocal at the Annual General Meeting (AGM) of the company, to continuing to work with company management on metrics, standard and performance.
David Harrison, sustainable equity fund manager at Rathbones, says: “Ongoing engagement is a powerful driver of positive change. We maintain regular dialogue with the companies we own to help drive continuous improvement in their sustainability goals and disclosure.
"This engagement is often a collaborative, not combative process – that is key. We are also using voting [at the AGM] as a tool to target specific ESG issues that may arise and work with other asset owners.”
Naomi Waistell, fund manager at Polar Capital, believes that stewardship is not merely good for ensuring that ESG principles are complied with, but also as a way to ensure the company remains an attractive investment for the future.
She says: “We analyse all ESG factors in the broader sense of how sustainable, how long-lasting, a business can be, taking into account ESG risks and opportunities. As this is an area that is subject to significant change, in both positive and negative directions, ongoing monitoring and updating of our understanding is vital.
"Engagement is undertaken directly by the investment team - fund managers and analysts - who are best-placed with vast depths of knowledge on each company and sector, and it is done via company meetings, calls, emails or via voting.
"Our approach to company engagement is that of a partnership. We aim to allocate capital to companies which we believe offer the best sustainable economic value added (EVA). By fostering an open, two-way dialogue with them we hope to protect and enhance value for our clients.”
Ama Seery, analyst at Janus Henderson, says that when a company is making demonstrable progress on ESG criteria, this should be viewed as a sign the company is innovative in all areas of business, adding that innovative companies tend to be better investments over the long term.
Annual Angst
>We analyse all ESG factors in the broader sense of how sustainable, how long-lasting, a business can be, taking into account ESG risks and opportunities.--Naomi Waistell
Peter Michaelis, head of the sustainable equity team at Liontrust, says that his team use the AGM to vote against the report and accounts as a way to highlight their disquiet at certain aspects of how a company is run. Liontrust also regularly engages with the companies in which they are invested as a way to monitor ongoing progress.
Mr Michaelis adds: “In 2016, the team began withholding support for companies that were not sufficiently gender diverse: where they had less than 15 per cent women on the board, we voted against the annual report and accounts at the AGM and abstained where this was greater than 15 per cent, but less than 30 per cent.
