Impact and sustainable investing
5 min read 30 Aug 22
“Before investors and other stakeholders such as regulators, NGOs and the media showed any interest in issues such as climate and diversity and inclusion, not much progress was being made in these areas,” says Rupert Krefting, Head of Corporate and Finance Stewardship at M&G Investments. “This has dramatically changed in recent years.”
Engaging with companies can play a crucial role in transforming businesses and aligning them with real world, long-term goals, particularly in areas such as climate and corporate governance.
However, companies can be cautious about setting targets before they have a fully thought out plan of action. Gaining corporate access to some companies can also be an occasional challenge, particularly when it comes to getting time with international executives.
“Well-managed companies provide regular corporate access to management for their shareholders to communicate key messages and seek feedback,” says Krefting. “This creates an opportunity for shareholders to engage constructively to encourage positive change or improved disclosure, for example.”
Climate is a central focus of M&G’s top-down engagement programme for investee companies across both developed and developing markets, focusing on strategy, disclosure, goals and targets to achieve decarbonisation.
But are companies moving fast enough in the transition to net zero? According to Krefting, this depends on geography and can be difficult to gauge on occasions.
“Lots of promises and most actions are back-end loaded towards the end of this decade, but sectors such as utilities in Europe and North America are making headway in phasing out coal and replacing it with renewable power,” he explains.
Krefting notes that investors should avoid micro-managing companies and instead focus on the big issues such as governance, strategy and capital allocation.
“Engagement can be a very powerful tool if carried out effectively, both bilaterally and collectively, through groups such as Climate Action 100+. If these fail there is always the use of a vote, and finally divestment.”
One of the most remarkable episodes during 2021 occurred at the AGM of a leading oil and gas company, where M&G opposed several directors, believing their behaviour in refusing to positively engage with shareholders was not in the company’s interests.
“We supported four dissident candidates nominated by investment firm Engine No.1,” says Krefting. “In the event, three directors were voted off the board and three of the dissident directors were elected, in what has been described as a milestone for shareholder activism.”
Another shareholder resolution on financial activism was co-filed at the company to highlight the importance of implementing climate risks into financial accounting.
As the race to net zero gathers pace, M&G has laid out an action plan to help achieve its climate goals, including phasing out investment from thermal coal and engaging with emissions-intensive investee companies.
Holdings have been mapped out to determine a targeted engagement list based on highest emissions and largest exposure. For each company, a specific engagement strategy is devised outlining clear objectives, key performance indicators to determine progress to delivery, as well as a timetable for engagement.
Overall, companies are expected to commit to net zero in line with the Paris Agreement, and provide credible targets and metrics outlining how will they do so.
“Divestment should only be considered when there is no hope of a company transitioning, for example if coal forms a central part of the business strategy,” says Krefting.
For investee companies in some sectors, the biggest technical challenge can be a reliance on new technology to solve issues such as carbon reduction, such as green hydrogen, electric arc furnaces and carbon capture utilisation and storage.
This is particularly the case in industries such as steel, cement and chemical production, which are all “hard to abate” sectors.
“Steel requires lots of heat in the smelting process and cement actually emits carbon as part of its chemical process as well requiring lots of heat, for example,” explains Krefting. “So carbon capture is seen as a potential solution but is not at a commercial scale yet, and is just at the pilot stage in many industries.”
Creating more diverse and inclusive workplaces is also high on the engagement agenda. M&G believes that an independent, demographically diverse boardroom is more likely to facilitate optimal long-term strategic decisions, as well as better represent the composition of a company’s employees, customers, and other stakeholders.
With this in mind, M&G has set an ambition for investee companies to have board gender equality by 2027, but the pace of change differs from region to region.
Expectations on pathways to achieve gender equality on company boards differ between large and small companies, and across geographies.
For example, a mining company has been encouraged to increase gender diversity throughout its workforce. M&G met with the company’s chief executive, new head of sustainability and investor relations to make expectations known.
Currently, the company has around 10% female representation throughout its workforce in Mozambique, but has set ambitious targets for the year ahead to increase this level. However, as staff turnaround is 2% a year, diversity progress will likely be slow. The company is aware that diversity is a key focus for M&G, and will continue to work on initiatives to increase gender diversity in its workforce.
Meanwhile, a global cyber and software resilience firm has committed to reaching 33% gender diversity in the near future. M&G voted in favour of all non-executive directors at the 2021 AGM, but wrote to the company following the meeting outlining conditions for future votes.
M&G indicated that it would likely be voting against the nomination committee chair if no improvement was seen following the following year’s AGM vote. The group appointed another female board member who took up the post in January 2022, demonstrating that the firm appears to be taking the matter seriously, and is a sign of its intentions to improve diversity around the board table.
Diversity is not just about gender, however. M&G’s minimum expectation for FTSE 100 companies is to have at least one director from a minority ethnic background.
To achieve these goals, M&G expects companies to disclose sufficient information and proposed plans on diversity to enable shareholders to make informed decisions on progress.
Regardless of the ultimate objective, the engagement process can be a long one. As Krefting points out, one of the main challenges investors face when trying to transform companies is time itself.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.