Alex Blackburne explores the long-term financial benefits of active ownership.
There was a time when investors at both an institutional and retail level would be almost entirely disconnected from what their assets were doing. The norm was to invest, sit back and collect the (hopefully healthy) dividend each quarter.
In the last decade, though, things have changed. A new wave of responsible investors are now engaging with companies they invest in, on issues as varied as tax, remuneration, human rights and environmental sustainability. Why? Because they acknowledge that investment value is increased by the integration of environmental, social and governance (ESG) factors.
Finally, the age of stewardship and active ownership is here.
We need investors to be “responsible stewards, not absentee landlords”, says Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF) on the second annual Ownership Day.
“They need to use the information and advice available to them to set the tone for how their funds are managed, and our research shows this is what the public – the people the funds are run for – want.”
Indeed, a YouGov poll conducted among British adults as part of Ownership Day found over half (53%) want public pension funds to engage with companies on paying fair tax. Fifty-one per cent want them to urge firms to pay the living wage, while 48% want excessive or disproportionate executive pay and bonuses to be addressed.
That’s all well and good, you might say, but does active ownership actually work? Various reports would suggest it does.
The 2012 Annual Responsible Investing Report from asset manager First State notes how the firm discovered serious environmental and health problems with some chemical products. It proceeded to engage with a range of companies, one of which – the Brazilian firm Natura – went on to remove the chemical in question, triclosan, from its products.
Elsewhere, the mining company Newmont was handed a shareholder resolution – when investors introduce issues for shareholders to vote on – in 2007. This followed a series of issues relating to its drilling activities in certain communities. An independent committee went on to conduct a thorough inspection of the company’s policies, which concluded that there was a disconnect between Newmont’s high standards and its real life practices. The board of directors swiftly developed an action plan to rectify the situation.
Active ownership is about creating better risk-adjusted returns over the long-term. And as with anything in the investment world, proving something has a financial or business case is key to its mainstreaming.
A chapter in the 2012 book, Contemporary Issues in Sustainability Accounting, Assurance and Reporting, describes how Calvert Investments and Domini Social Investments – along with the New York Office of Comptroller – submitted a resolution to retail giant Gap, calling for transparency over its treatment of workers. The organisations claimed that Gap’s brand was at risk of a major consumer boycott because of the poor labour standards in its supply chain. The resolution was subsequently withdrawn after Gap pledged to improve its disclosure and standards. Today, the vast majority – around 99% – of Gap factories are monitored, with the company working with local governments to improve labour rights.
Initiatives like the Principles for Responsible Investment (PRI) have helped thrust active ownership and shareholder engagement into the spotlight. Through the PRI, signatories can club together on certain issues. Whereas one committed shareholder alone might struggle to make their voice heard, 10 or 20 major institutional investors all speaking out at annual general meetings makes companies really sit up.
James Gifford, the PRI’s former executive director, told Blue & Green Tomorrow in last year’s Guide to Ownership that that ownership was about shareholders taking their roles as part-owners of a company seriously.
“Investors are not just there to set a price for the shares; they’re not just there to buy and sell when the price is good or bad. They are there to monitor managers, and ensure that managers are acting in the long-term interests of the owners of that company. And that takes some proactivity”, he said.
Meanwhile George Latham of WHEB Listed Equities, a specialist sustainability investor, wrote in an article that ownership leads to “richer conversations” with companies they are investing in.
“We learn more about the quality of the management team, and we believe that we gain a better understanding of their likelihood of success. We believe this gives us an insight into the company’s valuation and provides us with a competitive edge in a way that improves the risk-return profile of our portfolios”, he added.
“The fact that effective ownership is not yet common in the investment industry is therefore perversely good for our relative return.”
There are clear moral questions associated with issues like child labour and human rights. But if – as an investor – you recognise that sustainability and ESG factors add value to the investment process, active ownership is an important tool.
Companies should be held to account for their actions. They should be urged to avoid clear investment risks. They should act responsibly and ethically, and not just seek every last inch of profit. Responsible investors are ahead of the curve in recognising this, and their voices are getting louder and louder.