The Power of Engagement

 

A criticism often aimed at responsible or ethical investing is what’s the point of me doing my little bit when the majority of the corporate world continues to destroy and plunder.

 Whilst this may sound a little extreme there is a concern that the relatively small amount of ring-fenced responsible investing is having little impact.

This view however ignores an important factor, and that is that fund managers in this area are having an ever growing influence on the corporate world via engagement. There is now a growing realisation that Investment managers acting by proxy, on behalf of us, the stakeholders can initiate real positive change. The new enlightened fund manager realises that he has an active representational role to play as well as the more arms-length financial function. And results can be significant.

Most of us will remember the terrible Rana Plazza fire that killed over a 1000 workers in a clothing factory in Bangladesh in 2013. As a result the ‘Accord on Fire and Building Safety’ and ‘Alliance for Bangladesh Worker Safety’ were instigated by NGO’s and workers unions. The investment community however were very influential in getting a number of corporates to sign up to these agreements, corporates such as M&S, Primark, and H&M. Investment houses such as Alliance Trust and Morgan Stanley have also hosted investor trips to factory sites to understand some of these issues first hand.

As a direct result of the Accord 1600 factories in Bangladesh have been visited with over 1400 owners to produce corrective action plans. More specifically investment managers, such as Alliance Trust are working closely with clothing companies to encourage responsible supply and buying practices. According to Neil Brown, Alliance Trust Investment Manager, one such company is Spanish multinational clothing company Inditex, who own brands such as Zara and Berksha. Alliance invest in them partly because they are taking a marketing lead in management of social and environmental issues. This approach has contributed to financial rewards. Neil comments that since buying Inditex in 2012 shares have risen by 151.6% compared to 38% from the MSCI Europe Index. (Source Alliance trust SRI hub April 2016).

 Many fund managers are extremely pro-active in engagement with individual companies. For example Eden Tree, previously Ecclesiastical, meets over 300 companies a year regarding sustainability and ethical issues, adding a more direct approach to the engagement process. These would include contacting Hugo Boss on sustainable cotton sourcing, Sky on board diversity and SCA on animal testing. (Source Eden Tree SRI Activity Summary Jan-March 2016)

 Whist pressure works on an individual level greater change often comes about from collaborative organisations such as the PRI. The Principles of Responsible Investment (PRI) was initiated by the then UN General Secretary, Kofi Annan, in 2006. He invited a group of the world’s largest institutional investors to develop and promote the principles of responsible investment. Since those early days the numbers of signatories have risen from 100 to 1500, and because of their clout they now carry considerable weight and influence within the world economy. One recent example would be group from the PRI calling on the Indonesian President to act on deforestation caused, in the main, by palm oil cultivation. In response President Jokowi has established the Peatlands Restoration Agency and committed to ambitious forest and peat conservation programmes.

 Many in the Industry also see engagement as the way to deal with the so-called Oil Incumbents. Whilst there has been a campaign in certain quarters to encourage divestment from the fossil fuel giants many believe this is ineffective because other institutions will buy those stocks off those that sell. Organisations such as Robeco are favouring an engagement approach. For example they are supporting the ‘Aiming for A’ campaign where they are persuading the likes of Shell and BP to disclose their climate strategy and the resilience of their operating portfolios to carbon limits. This is in light of the unprecedented problem now posed by stranded assets. (www.robeco.com/en/professionals /insights)

 My view is perhaps that a combination of both approaches will eventually force the change that is needed to create a more sustainable planet. What is beyond doubt however is that engagement must continue , and this engagement must also include us the ultimate stakeholders. Many providers are now encouraging dialogue with advisers and investors. For example many companies, such as Aviva, now have twitter accounts. Others like Alliance Trust , mentioned earlier run blog sites that you can comment on.

 The point is these providers will ultimately demand what we the public ask for. If we demand that investment should respect our environment and society they will oblige.

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