Dale Carnegie’s How to win friends and influence people’ – now in its 28th edition – has sold more than 30 million copies worldwide. Warren Buffett himself said that the book changed his life.
In recent months, we interviewed several investor relations (IR) teams from our portfolio companies. Our insights from these interviews, suggest that the book’s core messages around honesty and respect would come in useful in helping investors engage more effectively with the companies held in our portfolios.
When it comes to positively impacting society, asset allocation is really just the first step. To make the greatest difference possible, large investors such as asset managers must embed stewardship and engagement firmly in their end-to-end process.
There’s certainly demand for it. Every single IR representative we spoke to said investor interest in sustainability and ESG issues of corporates had dramatically increased over the past five years. As one individual put it: “We used to have environmental, social and governance (ESG) investor calls once a quarter and now they happen almost weekly.”
This is, quite frankly, excellent. Investment managers have a responsibility to monitor the ESG performance of their investee companies on an ongoing basis. It is also their duty to advocate for progressive change if required.
Growing pains for corporate governance
All this must be done, however, in the right way. And our research suggests this is an area in which some growing pains remain.
Many interviewees bemoaned the ‘checkbox approach’ still being taken by large investors when it comes to ESG, suggesting it indicates a lack of true understanding.
They pointed to generic emails sent to hundreds of companies that fail to reflect the reality of very different businesses operating in very different areas. Likewise, they also highlighted a regular disconnect between fund managers and stewardship teams along with vague, open-ended questions sent at the very last minute.
In one particular horror story, we were told of a large investor who threatened to vote against management unless they completed a detailed carbon strategy questionnaire. This would have been fine, of course, had they not been given just 24 hours to do so.
Proactive partnerships
Clearly, this piecemeal approach is far from ideal. Much more useful is a style of stewardship and engagement based around a strong, ongoing partnership.
For investors, this means thoughtful preparation that considers publicly available information on material ESG issues that affect an investee company’s long-term success. It means entering into dialogue with an investee to carefully outline the issue and, if necessary, use appropriate methods such as proxy voting, collaboration with other investors and even divestment to escalate the engagement if the issue is not adequately addressed.
For investees, meanwhile, it involves acknowledging any issues raised and disclosing the relevant information. Where issues are recognised as material, it then involves committing to an appropriate policy to manage the issue and providing ongoing evidence that the issue is being managed.
One of our interviewees summarised the benefits of this partnership approach perfectly when he said: “I would actually like to have a more ongoing dialogue [with investors] because that’s the way we can best help. Working together, we can get better and provide the right information.”
A brighter future
Success doesn’t happen overnight, and effective partnership is easier said than done. To be effective ESG engagement needs to be integrated with a broader understanding of the commercial realities of a business.
But this will often require asset managers to structure their engagement activity differently – relying more heavily on already hard-pressed fund and portfolio managers. Done well, engagement also needs to be better-resourced and less dependent on junior, inexperienced analysts.
Another vexed question is who gets to decide what issues are material? Investors keen to demonstrate their ESG credentials, may want comprehensive responses from investee companies on a wide range of issues. Investee companies though may feel that many of these issues are not material to their activities. How these tensions get resolved is not clear.
These issues are real and challenging, but they should not detract from the bigger picture and the tremendous positive change that has taken place in recent years. A significant proportion of investors and investees are now in dialogue, working together to deliver improved performance on a myriad of social and environmental issues.
Seb Beloe is head of research at WHEB Asset Management. The views expressed above should not be taken as investment advice.