Engagement is not something which happens over night
Active ownership is about using your rights and influence as an investor to engage investee companies in a productive dialogue and driving change that can make a tangible difference.
Yet the process of actually engaging these companies can often be hard to quantify, and many may be surprised at the timeline over which this can unfold.
As a long-term investor, our relationship with investee firms can continue for many years – decades in some cases. We have a duty to our clients and wider stakeholders in society to monitor and engage with companies for the entire time that we hold their stocks and bonds – and in a fashion that helps protect all our interests long into the future.
While every engagement may differ and will have its individual objectives established upfront, we usually consider 24-36 months to be a reasonable timeframe through which to elicit a desired change. This is not including the analysis time taken beforehand to identify which companies we want to engage with and on what issues.
This initial assessment is critical to the success of the overall process. Indeed, we need to have an in-depth understanding of the company to determine precise objectives for the engagement, aligned with our overall commitments and engagement priorities as an asset manager, but customised to the specific needs and situation of the issuer to ensure relevance and success of the engagement. These are objectives which we will keep coming back to during the whole process, and which will also be essential to measure progress and account for engagement success, but also, in other cases, support any decision to escalate.
To an outside observer, and particularly when contrasted alongside strategies which simply exclude companies, it may appear that little headway is being made during this time. But the truth is that a lot of the work around engagement is not seen by end investors and that this is a constant and ever-evolving process.
The changes we are typically asking to be implemented cannot be made overnight, which is why in our view, active ownership can only truly be aligned with long-term investing. Indeed, the very ethos of long-term investing in specific companies goes hand-in-hand with trying to achieve change.
Our typical timeline for driving this change will start by identifying issues and engaging the company around these, followed by an initial response. These issues will of course range across many different areas of a business, from the way boards are structured, to the amount of carbon a company currently emits, with each one requiring an individual approach.
This initial process can take anything between three to six months whereby we will push the company to acknowledge the issue. It could then take a further one to two years of dialogue and pushing before we feel we have come to a suitable resolution.
Naturally, these goals can be hard to quantify for end investors, especially as people have their own views on what matters to them most. But getting companies to change their behaviour on specific issues is one way to define success, with the potential to deliver solid outcomes.
As investors, our objective is clear – we want a ‘win-win’ of improving risk-adjusted returns while contributing to broader societal and environmental objectives as defined in the UN SDGs.
This is not something that can be achieved through one meeting or a strongly worded letter. It requires ongoing narrative where we may be educating the company on the issue we’re pushing for a resolution on and then monitoring to see what progress they’re making in tackling this – what interim targets have been set, what changes (large or small) have already been made, is our engagement reaching higher up the corporate food chain?
An example of a successful resolution is Spanish oil company Repsol, with whom we have engaged with intensively in recent years over carbon emissions, both through one-to-one dialogue and through collaborative initiatives. Repsol has since announced it aims to achieve net zero emissions by 2050, making it the first oil and gas company in the world to assume this ambitious goal. At the same time, it is setting a decarbonisation path with intermediate targets for 2020 to 2040.
However, engagement does not always progress smoothly - responses given by companies can be either unsatisfactory or too slow.
In these scenarios, it is crucial that we escalate the issue to keep the process moving and maximise the chance of meeting our engagement objective.
Escalation can take many forms and is something that we will pursue before resorting to the blunt tool of divestment. We also do not believe in a ‘benchmark for failure’ in regard to how long we will pursue engagement. If, for example, we have not made satisfactory strides through a certain channel, our next step will be to pursue another. We may target more senior input, seeking to move the discussion up the corporate ladder, or, collaborate with other investors, working together to send a unified message to the company.
However, divestment can be a means to put pressure on the company to change its practices and is something we are prepared to do and have done in the past.
As active investors there are a number of levers we can and do pull to influence change. But as a discipline, this requires ongoing and continual levels of engagement - there are no silver bullets. Meaningful change can only be driven through having clear objectives, perseverance and the patience to do so.