Lessons in successful shareholder engagement

Liontrust's Harriet Parker details how the sustainable investment team practise shareholder engagement

Engagement is integral to how investors ensure their focus is on high-quality equities and bonds. In short, the process is about improving the stocks owned: engaging on key environmental, social and governance (ESG) issues gives greater insight and helps identify leading companies, and is also used as a lever to encourage better business practices.

The Liontrust Sustainable team has been engaging in this way since 2001 and we have found this approach challenges and encourages companies to proactively manage the wider aspects of their business, which, in turn, protects their longer-term prospects.

Central to the approach is the fact all the elements of sustainable investment are integrated within a single team. Every member is responsible for all aspects of financial, ESG and engagement relating to an investment decision and what this means in practice is that engagement is an ongoing part of the process rather than a separate arm. Every time there is a meeting with a company, engagement on a range of issues will form part of the overall stock analysis.

In 2019, the team met with 185 companies face to face and raised 245 key ESG issues with these over the year, either in direct meetings or through other forms of correspondence such as letters and emails.

Stepping up engagement with companies to ensure they reduce their absolute carbon emissions to zero is key. Businesses that are proactive in reducing emissions, and are able to articulate this in their business strategy, will gain a competitive advantage and generate better investment returns; those that do not will face increasing risks to their businesses.

It is important for investee companies to explain how they plan to decarbonise their businesses to limit global warming. Over 200 companies across our portfolios have until the end of 2020 to provide a zero carbon plan and timescale and investors should use all measures at their disposal, including voting and ultimately divesting over time, to persuade companies to reduce emissions.

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Another key area is gender diversity. In 2016, the team began withholding support for companies that are not sufficiently gender diverse: where they had less than 15% women on the board, we voted against the annual report and accounts at the AGM and abstained where this was greater than 15% but less than 30%.

Twenty-one companies have increased the proportion of women on the board to over 30%, such that we no longer need to withhold support. After voting, these companies have an average of 38% female boards, compared to just 22% previously.

A further fifteen companies have increased the number of women on their boards, and we remain positive that continued efforts should result in further progress. These companies now have an average of 26% female boards, compared to 17% before we voted on this issue. There are 13 companies where we have seen less progress on increasing gender diversity so we will continue to engage to effect real change.

Treatment of staff also continues to be a key engagement issue, particularly in light of concerns about the poor employment standards of the so-called ‘gig economy’. Taking Gym Group as an example, we need to ensure it is treating its trainers fairly. The company has to balance the needs of its trainers, ensuring they have the opportunity for full employment with associated rights, while also recognising that some wish to remain self-employed.

Each year a number of proactive engagement initiatives are prioritised in collaboration with our Advisory Committee. Holdings are assessed on how they are positioned on these issues and, where appropriate, target companies highlighted for engagement. For 2020, the initiatives are the same as last year, with two important changes: a step back from a focus on anti-bribery and corruption to allocate more time and resource to engaging with companies on the climate crisis.

Continued engagement over a longer time period is likely to achieve better outcomes than over a yearly reporting cycle, so ongoing, longer-term priority initiatives include:

  • Impact and Sustainable Development Goals: Quantifying the main impacts (good and bad) from investee companies remains a priority; engaging with companies to disclose their main impacts so these can be reported on.  
  • Encouraging sustainable use of plastics: Looking for companies providing solutions to plastic pollution as potential investments, as well encouraging them to reduce the amount of single-use plastics they introduce to the environment.
  • Increased corporate diversity: More diverse companies are better able to prosper over the long term and engagement should encourage greater diversity, looking at gender balance at board level and senior positions and efforts to reduce gender pay gaps.
  • Worker well-being: How companies manage human capital of their direct operations, as well as workers further down supply chains, can affect long-term success. Engagement should encourage companies to offer decent work and pay living wages and to ensure they mitigate risks, protect workers’ rights and maximise the opportunities to support employees.
  • Encouraging the transition to sustainable investment: Individuals are having to take responsibility for their long-term finances and adequate savings and pension provision is critical.  To date, the majority of saving has been into non sustainable funds but as demand for sustainable investment grows, companies should do all they can to promote it. We will focus on determining which are leading the way and which need to do more.

Harriet Parker, is investment manager for the Liontrust sustainable investment team and editorial panellist for ESG Clarity

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...