Strategies
The concept of active ownership recognizes that long-term institutional investors face difficulties using divestment to limit risk or to signal disapproval with corporate managers. For large investors, moving out of a security can be difficult, especially for illiquid holdings. For passive investors, it’s simply not an option. On the other hand, engagement allows investors to retain their holdings while targeting corporate behaviour through dialogue. Some large institutions focus their energies on a limited number of companies each year, and there is some evidence of a direct link between well-organized engagement and subsequent financial performance.
Another common method of exercising active ownership is through a proxy voting policy, which often takes the form of a public document listing the beliefs that govern each institution and how it generally intends to vote on specific shareholder proposals.
Some of the leading institutions practising RI have begun to launch their own shareholder proposals. To build support among investors, they may hold general information sessions for analysts and shareholders or work with collaborative networks seeking support prior to the annual general meeting.
Proxy votes are another manifestation of the institution’s ownership stake in a given company so, at a minimum, it would be prudent to find out how the institution’s proxies are being voted by external managers. A dialogue with external managers on corporate governance issues is critical to gain additional insight into particular proxy contests.
Disclosure and Transparency
Underlying many proxy contests is a desire for greater transparency about corporate performance and practices. Transparency is key to the effective management of ESG issues, just as it is for mainstream financial risks and opportunities.
Many of the PRI signatories support the principle of transparency by participating in related initiatives that strive to improve the quality of company data. Two initiatives of note include the Carbon Disclosure Project (CDP) and the Extractive Industries Transparency Initiative (EITI).
The CDP is an independent not-for-profit organization aiming to create a lasting relationship between shareholders and corporations to tackle the implications of climate change for shareholder value and commercial operations. It provides a coordinating secretariat for institutional investors and a website that is the world’s largest source of corporate greenhouse gas emissions data. It seeks information on the business risks and opportunities presented by climate change and greenhouse gas emissions data from the world’s largest companies (3,000 in 2008).
Launched in 2002, the EITI is a collaborative initiative including governments, companies, non-governmental organizations, investors and international organizations. It focuses on improving governance in resource-rich countries through the verification and full publication of company payments and government revenues from oil, gas and mining. The priorities of the EITI secretariat include obtaining support from major emerging markets (particularly China, Russia, India and Brazil), encouraging proper implementation of EITI by candidate countries and expanding the countries covered to include regions that are currently under-represented.
Legislative and regulatory requirements also drive transparency. In the U.K., all pension plans are required, by law, to disclose how they deal with ESG issues. They are not guided toward any particular conclusion and are free to categorically reject ESG analysis, but they must at least explain how they reach their conclusions. Similar legislation exists in Australia. These disclosure requirements have focused the collective minds of the pension industry on ESG considerations and have contributed to a marked increase in the utilization of RI strategies.
