How can an asset manger with a relatively small stake in a company effectively persuade its management to move toward sustainability goals?
Chow believes the percentage of the company that the investment team at Hermes IM holds is not the strongest factor.
“If you challenge a company with the right questions, there will be some support from other individual shareholders even though they are not bound by a contract,” Chow said. “That would create additional pressure on the companies.
“Hermes may seem to be a small name in the shareholder registry for each company we invest in and engage with. But we represent some big asset owner clients in the US, Canada and Europe.”
In the engagement process, Chow said it should always come with “intentionality”. That means her team compiles ESG objectives, based on their internal research, and brings it to senior management of the investee company.
“We frame the questions and their sequence in a way that is sensitive to internal politics, and hopefully the management of the companies will agree with us that they need improvement.”
After the companies acknowledge the engagement issues, the next step is for the company to devise a plan to implement the goals. This stage may take some time as it depends heavily on the internal agreement for the changes, Chow said.
Investment and engagement
The ESG engagement team approaches a company differently than an investment team, Chow said.
Investment is about picking the right companies and avoiding the worst ones, she explained. The engagement team, by comparison, is attempting to bring about change at the company. Investment and engagement share information.
She cited an example of how the engagement unit suggested to the investment team internally to be aware of risks at German car maker Volkswagen before the emissions scandal.
“We had absolutely no idea about the ‘dieselgate’ [scandal]. What we learnt from engagement was that their management was top-down at the time delivering some challenging targets. The analysis suggested that the governance culture at the company was deteriorating.”
According to her, managers at Hermes IM evaluated the risk-adjusted return and sold the stocks before the scandal surfaced.
All the public and private engagement discussions are logged internally in a database, according to Chow.
“If the momentum of the discussion is particularly negative, we could flag the clients with an alert,” she added.
In unsuccessful cases, either the companies never respond or their response is not meaningful enough. Chow said her team would discontinue the engagement process and inform Hermes investors about the reasons for the decision.
– This article first appeared on ESG Clarity‘s sister site Fund Selector Asia.