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Regroup or get help? AXA IM’s Humeau asks what can asset managers really do when engagement fails? 

 

 

by Clemence Humeau, head of responsible investment coordination and governance at AXA Investment Managers

The asset management industry has a duty to help accelerate the transition towards a more sustainable world by engaging with companies at different stages of the process of transition.

Active ownership at its core is about using your rights and influence as an investor to engage investee companies and to push the industry to secure a thriving future for people and the planet.

By opening up a productive and collaborative dialogue with investee companies we, as active investors, play a vital role in driving change that can make a tangible difference.

However, engagement does not always progress smoothly. Once the lines of communication are opened with a company on a certain issue, responses can be either unsatisfactory or slow, both of which are cause for concern. It is crucial in such cases to determine when to and how to escalate the issue to keep the process moving, and maximise the chance of meeting our long-term objectives.

There are many ways in which active managers may choose to intensify their engagement – these can be done either exclusively or through a combination of different means, depending on the case. Engagement requires ongoing, continual discipline and a strong understanding that what works for one company may not work for another. All options should be considered or pursued, according to individual circumstances.

One of the most commonly used escalation processes is targeting more senior input. Depending on the issue being engaged on, there will be employees and stakeholders who may be better suited to hold those conversations with. For example, on corporate governance topics, conversations would be most productively held with the company secretary or a board member, whereas climate conversations might be better suited to a head of climate or sustainability. If the initial response from a company is lacking and the engagement process is not progressing to a satisfactory level, moving the discussion up the corporate chain can be the only option. Ultimately the goal is to ensure that the board understands what the shareholder is looking for and the only way to do this might be to involve the board directly.

One voice may not be heard, but the combining influence of multiple investors has huge power. Most engagement processes may typically be done by an asset manager themselves, but collaboration with other likeminded shareholders, through formal industry groups or via ad-hoc associations, can send a stronger unified message. Initiatives such as Climate Action 100+, a group made up of more than 615 investors, responsible for over $60 trillion in assets under management, wield huge influence in the industry. Involvement in initiatives such as this can often have greater impact on companies which need that extra push to change.

Industry initiatives are not the only group activity that can help intensify pressure on companies. As interest in ESG across geographies grows among clients, consumers and regulators, the need for clearer definitions and usable standards is a top priority for the financial industry. Involvement with policy makers should therefore form an important area for public policy engagement. We would encourage all investors to actively participate in industry bodies, as well as interact with regulators to share their views on sustainability related regulatory changes, helping to ensure the latter succeed in bringing further confidence to investors and tackling greenwashing risks.

Voting is another integral part of the engagement process and can often be one of the most productive. At annual general meetings investors get a chance to vote for and against resolutions ranging from executive renumeration to climate issues. Voting is intended to be beneficial to the long-term, sustainable value of the company, and voting against resolutions at AGMs can be a mechanism to escalate engagement concerns. When engagement on key themes has stalled, we can show dissent through a vote against specific resolutions. Alternatively, co-filing a resolution may be considered if needed. Using voting as a method of escalation ensures companies remain on track.

Divestment is another option, but one that we believe should be a last resort. Engagement is about working with a company to push for the transition towards a more sustainable future and by divesting you are no longer part of that conversation. However, this does not mean that it, and even the consideration of divestment, cannot be a useful tool to escalate engagement issues.

If satisfactory changes have not been made through other channels of escalation, then divestment will have to be considered.

For example, while we do not believe in a ‘benchmark for failure’ we do set strict criteria around what we expect from companies who fail to meet our climate related expectations. From 2022, we are taking this a step further and will be defining clear objectives for our holdings and monitoring actions until 2025. If progress on their net-zero path is not substantial we will divest on a ‘three strikes and you’re out’ principle.

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