How do Fund Managers View Engagement?

I’ve gone through a whole host of fund manager answers to see what they said when we asked the following: "have you ever engaged with a company and been particularly proud (or disappointed) in the outcome?"

From Beehives to Brazil

The variety of answers we get to this question does also speak to the differences in what the fund manager interviewees are aiming to achieve. For example, Polina Kurdyavko, head of emerging markets at BlueBay Asset Management and manager of RBC BlueBay Emerging Market Debt, has been working on an engagement initiative on deforestation in Brazil.

"In June 2020, we were invited to join with other investors to write to the government of Brazil and express our concern over the rising pace of deforestation in the Amazon and other parts of the country," she said.

"We helped to fine tune the content, highlighting why we see forest loss as a material risk to the investment thesis for Brazilian fixed income assets, and making sure that the embassy in London was one of the points of contact for the finished letter."

Working with Norwegian Storebrand Asset Management, the Investor Policy Dialogue on Deforestation was founded, and the group has since grown to include 57 financial institutions from 18 countries ("including Brazil – it’s particularly important to counter accusations that we were 'meddling foreigners' undermining national sovereignty") with approximately $7.2 trillion in assets under management (as of Jan 2022).

When working with emerging markets and debt, it makes sense to operate with the big picture in mind. But engagement can also mean taking a local approach.

Suzima Abu-Zarin, fund manager of LF Canlife UK Property ACS at Canada Life Asset Management, says some of the managing agents she’s worked with are working practically to integrate ESG and improve cost efficiency and effective energy management.

She said: "A few have been really willing to think outside the box and come up with new solutions or ideas. Some have even put beehives on the roof to support biodiversity!”

Divesting

For others, there was no other option than to sell out of a company, even if environmental policies were in place. Claudia Quiroz, lead manager of Quilter Cheviot Climate Assets Balanced fund, explained how her team has increased its focused engagement with companies it owns, which has led to tough choices.

"Kingspan (KGP) was a longstanding holding for the Climate Assets strategy, so to sell it after engaging with the company was a very disappointing outcome for us," she said.

"We decided to divest after engagement on policies and systems relevant to the Grenfell fire accident. This is a good example, where a company may provide a solution to an environmental problem, like reducing energy consumption with building insulation, but failing our hurdle for the sustainable investment strategy."

Conversations with Companies

But for many, engagement means maintaining detailed knowledge and close relationships with companies.

Andrew Hardy, who oversees funds including VT Momentum Diversified Cautious, VT Momentum Diversified Balanced, VT Momentum Diversified Moderate, VT Momentum Diversified Income, and VT Momentum Diversified Growth, says this approach results in good engagement when there is an issue to address.

His team recently worked with Gore Street Energy Storage (GSF), which sought approval to materially increase leverage limits.

"We shared our concerns with the manager and chairman, who valued our input and provided assurances that they would seek further shareholder approval prior to using the additional headroom," he said.

Baylee Wakefield, a fund manager at the Aviva Investors Multi Asset Fund range, which includes Aviva Investors Distribution, explains that the ESG team has driven board-level change at Chubu Electric, after several years of dialogue on governance and climate-related issues, such as a net-zero 2050 ambition.

Wakefield said: "Most notably, [positive changes] included the recent refreshment of the board with the addition of two new members and increase of independent directors in tandem with a suite of diversity initiatives, including a 2025 target to triple the number of female managers from FY2014, both long-standing engagement requests."

Seeking Commitment

Another popular method is to get companies to sign up to industry initiatives. Oliver Gardey and Colm Walsh, co-managers of the ICG Enterprise Trust (ICGT), are regularly discussing investment activity to ensure strategies remain aligned with its responsible investing policy.

One of these policies is to get its managers to sign up to an industry initiative that helps companies they own roll out share ownership programmes for employees at all levels of a business.

"We really support this initiative as it allows all stakeholders to benefit from investment success," they said.

What Does This Mean for Investors?

As is clear, there are several ways to approach ESG engagement, and there’s no one-size-fits-all approach – after all, a growth fund and a bond fund will have different goals.

As Morningstar’s CEO Kunal Kapoor said at the latest Morningstar Investment Conference in Amsterdam: ESG is all about providing investors choice.

"ESG data can be used for people to take the opposite sides of the same set of data, and that’s okay," he said.

"That's what investing is about. What makes a market is differing views, and I don’t think ESG is any different other than the fact that probably ESG allows for an ever more expanding set of preferences that people can use to build a portfolio. And I think it’s a good thing because so many investors don’t feel a connection to their money. And I think if you are suddenly a place where you can express your preferences, your engagement with your money is probably going to be higher than ever, which I think is a good thing."