The rise of ESG (Environmental, Social and Governance) investing in recent years has been accompanied by a passionate and ongoing debate around one of the central tenets; how best to drive improvements in company operations and practices.
Like anything in the realm of ESG investing, the answer can depend heavily on personal preferences and an individual’s perception of what ethical or sustainable investing means to them. For some, divestment (selling) is the only option when confronted with fossil fuel companies, those with high emissions, or other businesses whose activities are not aligned with their values. This is particularly the case where the non-financial return on their portfolio is of significant importance.
What is active ownership?
The alternative to divestment is to participate in improving a company’s activities or behaviour, through a combination of exercising voting rights, engaging in dialogue with the company, and where appropriate, working collaboratively with other owners to promote change. This collection of activities is frequently referred to as ‘active ownership’.
Active ownership in practice
Voting is perhaps the most measurable form of active ownership. Investors can convey their views on specific proposals at company meetings by voting for, against, or abstaining on a proposal put forward by the company’s board. Shareholders have long done this, particularly in relation to governance issues such as executive pay and director nominations, but in recent years environmental and social issues have increasingly come to the fore.
In 2021, small activist hedge fund, Engine No. 1 drew the spotlight of media attention when it succeeded in nominating three directors to the board of oil giant Exxon Mobil with the aim of driving reductions in its carbon emissions. It would not have succeeded without the support of fellow, larger, institutional investors including BlackRock, Vanguard, and State Street. It is worth noting, however, that a great deal of change can also be achieved via dialogue with companies, formal or otherwise, before escalation to an AGM is deemed appropriate.
The story of Engine No. 1 demonstrates the value of collaborating with others. Whether it be through pooling voting power or supporting mutual engagements, the chorus of an investor group is far louder than a single voice. Additionally, group engagements often attract more attention from company management, especially where it is clear that an issue or behaviour is concerning to a larger proportion of their investor base. Platforms such as the Investor Forum and Climate Action 100+, both of which Evelyn Partners Investment Management LLP is a member, allow institutional investors to exchange best ideas and approaches for meaningful dialogue with companies.
In addition to avoiding the most challenged sectors, from an ESG perspective we favour an active ownership approach from the funds we own within the Sustainable Evelyn Active Portfolios. We expect the fund managers to operate as exemplary stewards, driving for positive change in company behaviours and activities, and ultimately delivering improving shareholder value over the long term.
Case study – Coho ESG US Large Cap Equity
One recent addition to the Sustainable Evelyn Active Portfolios funds, which fully integrates an active ownership approach is Coho ESG US Large Cap Equity. In its 2022 impact report, Coho Partners details its philosophy and approach to achieving positive outcomes with investee companies as well as case studies of its engagements, emphasising particular issues it has focused on over the year.
One key issue is the accountability of the board of directors of investee companies, as well as the makeup of those boards. As the senior leadership of organisations that hold executive management accountable, company boards are often the first place that investors seek change, aiming for a robust, responsible culture at the top to influence the culture throughout the rest of the firm. Coho has engaged with its companies and used its proxy voting activities to encourage boards to expand their oversight beyond traditional governance issues and to put social and environmental issues at the forefront of discussions. Coho has also noted that diversity on boards is key; gender diversity has improved in recent years, and it is now focusing on ethnic diversity, where there has been less progress. It tracks and measures progress on these issues over time, which informs future engagement roadmaps.
Active ownership is not necessarily straightforward; some companies can be intransigent when it comes to the prospect of change, which can call into question the value of continuing engagement efforts over divestment. Regardless, we believe that it is the right path; investors have the opportunity to drive real and meaningful change in a world of finite resources and extreme inequality, and they should take it.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. Details correct at time of writing.
Please note that some ethical funds may, by definition, have a limited investment universe; this may affect performance.
The value of an investment may go down as well as up and you may get back less than you originally invested.