We ask fund managers how they have used their shareholder influence to drive positive change.
The world of investing ethically is littered with acronyms – there’s ESG, SRI and impact investing – to name a few.
While the terminology can confuse and be off-putting, the fundamental principle of ethical investing (or however else it is labelled or described) is supporting businesses ‘doing good’.
Some fund managers take more of a back seat approach to environmental, social and governance factors (ESG) by just screening out the ‘sinners’ – businesses deemed unethical.
Others, however, proactively engage with companies and try to use their shareholder influence to drive positive change. Below we run through specific examples on how three fund managers go about their business in this respect.
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'Collective power can help businesses do good'
Lee Qian, co-manager of Baillie Gifford Positive Change, one of interactive investor’s ACE 40 funds, says being committed to invest for several years plays a key part in successfully engaging with companies.
He picks out Moderna (NASDAQ:MRNA), now a household name due to its Covid-19 vaccine, as an example of a company that he has positively engaged with.
Qian points out the fund invested before the pandemic at IPO, which has helped to build a strong relationship with the management team. He adds the team had frequent dialogue as the company started to develop the vaccine for coronavirus.
“We had meetings with the company to discuss their thinking of scaling up manufacturing and whether there are things they can do to move faster in the development stage. We also discussed their thinking regarding the pricing of the vaccine to make sure that it is affordable and accessible,” says Qian.
He adds he cannot claim that due to his engagements alone a company will pursue a certain strategy or go down a certain path, but the collective power of a large group of long-term shareholders “helps a management team to be more confident in doing the right thing for the long term good of its business and society”.
Qian names Umicore (EURONEXT:UMI), a world leader in cobalt products, as another example of positive engagement paying off. Cobalt is a key component in rechargeable batteries for electric cars. The use of cobalt, however, is controversial. Roughly half of the metal is mined in the Democratic Republic of Congo, where concerns have been raised about human rights abuses and child labour.
“Health and safety, amongst other issues, make it a difficult place to operate,” adds Qian.
Umicore, however, only sources ethical cobalt. As a result of the firm’s “very high ethical standard” the raw material has a higher cost, Qian points out.
As sustainable cobalt sourcing is the right thing to do morally, and from a social and environmental standpoint, Baillie Gifford Positive change has been providing support for Umicore to stick to their ethical guidelines.
“Once again, I cannot say it is just because of us that they have done that, but once again we believe that if the company have numerous interactions with long-term sensible shareholders who provide support for the company to do the right thing, it makes it a lot easier for the management team to pursue that strategy,” adds Qian.
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'We set companies specific targets'
In a similar ilk Simon Holmes, lead fund manager of the BMO Sustainable Universal MAP range, engages with companies by “talking to company management on specific areas where we think they could improve their approach from a sustainability perspective, for example, by working with them over time to set specific targets.”
Holmes points out that in 2020, BMO engaged with 58 companies and recorded 37 ‘milestones’ – instances where a company changes its practices following active engagement. BMO says milestones it has hit relate to governance, climate change and environmental standards. Three of the BMO Sustainable Universal MAP fund range are endorsed by interactive investor as quick-start funds as well as being in the ACE 40.
Holmes says, as an example, for labour issues BMO may talk and write to companies to request they become a living wage employer. “Or we will ask companies with long supply chains, particularly overseas, to examine their supply chain for risks of things like slavery – where employees are forced to work at very low wage levels,” he adds.
GlaxoSmithKline had been under fire for executive pay, particularly in relation to pension contributions. The firm consulted with investors and Holmes points out BMO “were an active part of that and following that agreed to align pension contributions of their top executives with those of the rest of the workforce by 2023.”
Smurfit Kappa, which specialises in paper-based packaging, is well placed to provide sustainable alternatives to plastic packaging. But Holmes notes as it is a large industrial firm it uses significant amounts of energy and water.
Following engagement from shareholders, including BMO, Holmes points out the firm has committed to set science-based targets for how much energy and water it uses, and how the firm will reduce this in future.
It is not just funds labelled ethical or sustainable that seek to make a positive difference. One example is Henderson Smaller Companies investment trust, which is in interactive investor’s Super 60 list. Its fund manager Neil Hermon recently wrote to every company in the portfolio, setting out the ESG criteria which he feels firms should be applying.
This included whether there are plans to reduce carbon emissions, issues around diversity and inclusion and the gender pay gap.
“Also critically for us in terms of the short-term we said we would not support any company paying a divided while they were receiving furlough payments,” adds Hermon.
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