As the waters of ESG investing continue to be churned by upcoming fund labelling announcements, accusations of greenwashing and a growing backlash to the industry, engagement has become an even more important fallback for fund managers.
Wondering where a fund will sit under SDR? Emphasise its engagement process. Explaining to clients why a fund holds polluters? Show them its engagement strategy.
In March this year, strategies that incorporate engagement had swelled to the third largest ESG investment strategy after ESG integration and exclusion, Kunal Desai, global emerging market equities portfolio manager at GIB Asset Management told ESG Clarity.
Funds that employ an engagement approach managed $10.5trn in assets, up from $8.4trn in 2016.
The danger is we end up with an overreliance on this approach as managers attempt to explain away some of the aforementioned negativity we have seen. In addition, as with any area of ESG investing, robustness varies wildly, which could lead to accusations of ‘engagement-washing’.
For example, Desai found 42% of UN PRI signatories mainly use third-party providers to engage and don’t have a portfolio-wide approach. He also found more than half of engagements lack depth and have no escalation strategy.
Chris Welsford, managing director at Ayres Punchard, told ESG Clarity there is a lot of variety in the effectiveness of engagement at the fund houses he looks at, and he has had to highlight company transgressions to funds that hold them.
“They do genuinely believe they are engaging properly with companies so if we point out inadequacies, they are a little crestfallen. The better ones will realise they could have asked a better question. Often they will say they are ‘reassured’ by a company’s response, but that doesn’t mean the company had a good response,” he said.
“They talk about voting. They talk about shareholder meetings. And of course that’s valid. But there needs to be some detailed work going on in the background.”
Among advisers ESG Clarity has been speaking with recently for our Q&A series, of which Welsford is one, there appears to be a healthy scepticism of fund houses’ claims of effective engagement.
“[Engagement] is a cop-out,” said Thomas and Thomas’ Darren Lloyd Thomas.
“It’s like me saying, ‘I don’t want to invest in sugar’, and you saying, ‘I’ve got Coca-Cola in the portfolio, but we’ve been engaging with Coca-Cola to reduce the sugar’. That’s great but I don’t want any sugar. You have to respect those red lines.”
The conversation around engagement is often one that doesn’t initially marry with end clients’ ideas about sustainable investing. Similarly, for Julian Parrott, partner at Ethical Futures, fund manager claims of engaging with big polluters can only go so far towards appealing to investors.
“That whole space of [banks] extending fossil fuels is an area of tension with what our clients are looking at what they’re expecting from funds,” he said.
“I don’t think many managers have really picked up on that – there’s still a sort of, ‘Well, we can engage with them and encourage them to change.’ But if you’ve got a big stake in Canadian tar sands or something, it’s a hard one to reverse.”
Engagement has the potential to generate big wins, such as the increasingly successful use of litigation, and engagement collaborations such as last month’s Valuing Water Finance Initiative. But strategies must step up, and not be used as a get out of jail free card, if they are to avoid becoming the next frontier of ESG scepticism.
