Q&A: How active managers are effecting change through ESG engagement

The UK’s FTSE 100 is dom­i­nat­ed by fos­sil fuel, min­ing and finan­cial companies—how chal­leng­ing is that index com­po­si­tion from an ESG per­spec­tive?

MH: BHP’s exit from its petro­le­um busi­ness and its poten­tial exit from the index may accel­er­ate a trend that we’ve seen over the last few years: com­pa­nies are becom­ing ‘green­er’ and more ESG friend­ly. We invest active­ly, which means we select the com­pa­nies that we invest in, rather than hold­ing a port­fo­lio that match­es the returns of the index. This allows us to put more into those com­pa­nies that are mov­ing toward sus­tain­able solu­tions or have stronger ESG cre­den­tials. The UK econ­o­my and stock mar­ket are evolv­ing from an ESG per­spec­tive and there are good oppor­tu­ni­ties to find com­pa­nies with these cre­den­tials.

How impor­tant is it to part­ner with com­pa­nies to improve their ESG stan­dards?

RC: Most of our clients are peo­ple sav­ing for their future and their retire­ment. We are look­ing to invest in com­pa­nies that will pro­vide good, sus­tained invest­ment returns over the long term. Being active share­hold­ers or ‘stew­ards’ of com­pa­nies is an impor­tant part of our invest­ment approach and we can add val­ue for our clients by being share­hold­ers that are ful­ly engaged with com­pa­ny man­age­ment teams.

We want to leave com­pa­nies stronger after we have invest­ed in them. If we feel there need to be changes in man­age­ment or we sup­port a restruc­ture of a busi­ness, that’s some­thing we’ll be involved in. This approach has added a lot of val­ue over many years. We are very pas­sion­ate about this. We’re own­ers of busi­ness­es and there­fore we’re pre­pared to invest for the long term, lock­ing away shares in com­pa­nies where we have mean­ing­ful stakes. This gives us an edge when engag­ing with poten­tial activists, the board and their advis­ers.

What makes the UK a good mar­ket for engag­ing with ESG issues?

MH: Com­pa­nies in the UK are very open, so the engage­ment oppor­tu­ni­ties are always there. Obvi­ous­ly, it helps when we have larg­er stakes in com­pa­nies, but UK report­ing require­ments mean that com­pa­nies are trans­par­ent. Report­ing is clear, the dis­clo­sures are good and it’s not just man­age­ment that we have access to—it’s the chair and the oth­er board mem­bers. We’re also increas­ing­ly engag­ing with the heads of sus­tain­abil­i­ty, who are appoint­ed with­in the com­pa­ny to speak to share­hold­ers about the issues that we’ve been talk­ing about for a long time. It’s good that with­in com­pa­nies there is now a ded­i­cat­ed per­son to speak to about these things.

Over the last few years it’s all coa­lesced around the com­mon buzz­words, ‘ESG’ and ‘sus­tain­abil­i­ty’. For us, we don’t think the wave of inter­est in ESG is a new thing—it’s part and par­cel of strong cor­po­rate gov­er­nance, which the UK mar­ket has offered for a long time through ini­tia­tives such as the Finan­cial Report­ing Council’s Stew­ard­ship Code. UK com­pa­nies engage with a degree of open­ness that doesn’t hap­pen in every mar­ket around the world.

In what ways can you hold com­pa­nies to account if they don’t meet their ESG tar­gets?

MH: We’ve spo­ken about the impor­tance of engage­ment, but this is cru­cial when it seems like every com­pa­ny is hang­ing their hat on their ESG and sus­tain­abil­i­ty cre­den­tials. Active, engaged investors like us are need­ed to chal­lenge man­age­ment to see if their tar­gets and claims are cred­i­ble, trans­par­ent and true dri­vers of busi­ness suc­cess. This is crit­i­cal as we see more and more com­pa­nies tying their CEO’s pay to ESG and sus­tain­abil­i­ty tar­gets. These can be fan­tas­tic dri­vers of change, but could also lead to soft tar­gets, which is some­thing we don’t want. As Richard said, we’ve been involved in board, man­age­ment and strat­e­gy changes at many com­pa­nies. We don’t shout about it, but it’s a cen­tral part of being an active and engaged investor. This is espe­cial­ly true in the UK mar­ket, where we see clear sus­tain­abil­i­ty and ESG-relat­ed val­u­a­tion oppor­tu­ni­ties at some com­pa­nies that are unre­alised.

Giv­en the UK market’s under­per­for­mance over the past five years, why is now a good time to invest in UK list­ed com­pa­nies?

RC: In a world of very low inter­est rates and a desire for growth, investors have been lured away from UK equi­ties. Com­bined with this pull away from UK equi­ties, we’ve had more than five years of uncer­tain­ty around the Brex­it nego­ti­a­tions. That was the pre­lude and then Brex­it almost felt like the final straw for UK equi­ties. But I think you’ve got to take a step back and think: trends tend to over­shoot on the way up and on the way down.

Although it’s been a long peri­od where UK equi­ties have strug­gled, rel­a­tive­ly, in a buoy­ant glob­al equi­ty mar­ket, that cre­ates a fan­tas­tic oppor­tu­ni­ty. There’s a result­ing val­u­a­tion cush­ion; the oppor­tu­ni­ty cost of oth­er mar­kets look­ing expen­sive. You don’t need things to go bril­liant­ly, just less bad. There’s quite extreme behav­iour in mar­kets out­side of UK equi­ties and I think the real call­ing card is that investors with a dif­fer­ent lens—like pri­vate equi­ty and over­seas corporates—are start­ing to be attract­ed by the val­u­a­tion oppor­tu­ni­ties in UK equi­ties.

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Pro­mot­ed by Colum­bia Thread­nee­dle