Increased pressure from both the public and shareholders has contributed to companies beginning to realise that it is in their best interest to engage with investors at a deeper level.
“Companies, particularly over the last few years, now see it as beneficial to understand their shareholders’ concerns so they can better address them,” says Alexia Palacios, analyst in responsible investment at Ruffer.
“The conversation around social and climate issues, for example, is moving so fast that companies feel that they need to demonstrate that they are managing these risks and opportunities appropriately. It can be very damaging to a company’s social licence to operate if they don’t appear to be addressing these concerns.”
Level of engagement
Despite these advancements, Palacios says that the level of engagement still depends on the company, the industry it is in and where it is located.
“Traditionally, companies in some jurisdictions, such as Europe, have tended to be more open than companies in other jurisdictions,” says Palacios, who joined Ruffer in 2014. “But when we talk about engagement, it is important to understand that it is not a linear process. Sometimes you make progress, but then a company may dig in its heels and the conversation stutters.
“It is essential that we can see a clear direction of travel. It is about finding a way to work with each other to understand the challenges the company faces and have detailed conversations about the underlying factors that are driving decisions.”
Charities and their asset managers have a duty to behave as responsible stewards, Palacios says. She believes that encouraging companies to set targets and holding them accountable for achieving them is vital for progress.
The way engagement is being structured recently is much clearer, says the responsible investment analyst. “Getting companies to set public targets and to improve their disclosures helps investors determine whether these companies are committed to those goals and making real progress.”
This can be amplified through collaboration, suggests Palacios. “It is a valuable tool to achieve real change when companies see their investors come together with one voice to push them to do more in a particular area. I think that collaborating to achieve the same objective is incredibly powerful.”
Collective voice
One example of how collaboration can effect change, she says, is Climate Action 100+, which is one the largest investor initiatives to tackle climate change to date. Ruffer was one of the founding signatories of the initiative, which is now supported by 450 investors with more than $40tn in assets under management.
The aim of the project is to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change through three defined goals:
- Implement a strong governance framework that clearly articulates the board’s accountability and oversight of climate change risks and opportunities;
- Take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris climate accord; and
- Provide enhanced corporate disclosure.
“The scale of this initiative gives considerable power to investors, and creates a valuable opportunity to exert continued pressure on companies to align their business models to transition successfully to a low-carbon economy,” Palacios says. “The companies this initiative is engaging with are of great importance, given their combined greenhouse gas emissions; their actions will have a meaningful effect on whether the goals of the Paris Agreement are met.”
Palacios says most charity trustees are on the same page. “They are passionate about ensuring that the assets of the charity are being invested responsibly. But, for some charities, it is not possible for them to engage with companies themselves.”
What trustees can do, she says, is ensure that their asset managers are incorporating Environment, Social and Governance (ESG) considerations into their analysis and the stewardship of their investments and keep the pressure on companies to change. “The pace of change in this area is energising, and there is considerable momentum that has already led to some significant commitments by companies.
“There is still much work to be done but we think that engagement, often through collaborative initiatives, is the best way to encourage companies to adapt their business models to enable them to be a positive force for change.”
Alexia Palacios is an analyst, responsible investment at Ruffer
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