People often think of responsible investing (RI) as a type of investment that involves selecting only companies with no environmental, social or governance issues. In other words, picture-perfect companies! However, there are no such companies…
Implementing responsible investments : seven strategies
There are seven strategies that shareholders can use to implement a responsible investment approach that will encourage the targeted companies to improve their practices. Prior to selecting securities, they can: apply exclusions based on principles; apply exclusions based on international standards; integrate environmental, social and governance (ESG) criteria into investment decisions; use the best in class approach; invest thematically; and practice social investment (impact investing). After selecting the securities, they can practice engaged or active shareholding.
While exclusions were the hallmark of responsible investing in the early days of the movement, today, with the practice of thematic and social investing still emerging, the most popular strategy is without a doubt shareholder engagement. The reason is that it allows us to have a direct impact on the companies that are included in an investment portfolio and whose practices are a source of concern.
Shareholder engagement : Three sources of leverage
Engaged shareholders can influence companies three ways.
1. Engaging in dialogue with companies
By targeting companies they are likely to have the most productive discussions with, shareholders can, for example, question the security policies that management or the board of directors has developed in the area of oil and gas transportation.
The company’s decision to make the required improvements could have a domino effect and entice its competitors to follow suit.
2. Proposing resolutions at a general meeting
If dialogue fails to produce any results, shareholders can submit a shareholder proposal to a vote at the annual general shareholders’ meeting.
Taking steps to have the environmental or the social or the governance issue debated publicly is also an effective way of encouraging companies to make improvements because the resolutions that shareholders submit and the results of the vote receive wide media coverage, which reinforces the leverage effect on the company in question.
3. Exercising the right to vote
At shareholders’ meetings, the investments funds vote on the proposals submitted by management and other investors on behalf of all the unitholders. The proposed resolutions usually cover subjects related to governance, such as the election of directors and executive compensation. But when shareholders propose resolutions, they also deal with environmental or social issues.
Slowly but surely
Responsible investing requires time and a lot of perseverance because discussions with companies can take place over several years. But in this area, one improvement leads to another.