16 May 2003
Socially Responsible Investing - The Rules of Engagement
In socially responsible investment circles, 'engagement' refers to the act of discussion and the expression of views. Both have the intention of influencing. But does engagement have any value or impact, or is it just a series of nice lunches in the best tradition of the old boys' club?
Many fund managers offering socially responsible investing (SRI) believe that there is a value to the consultations and discussions they have about environmental and social issues with the companies in which they are shareholders. I agree that this type of interaction offers an important opportunity and serves several purposes, including: repetition of the importance of good management of corporate social responsibility (CSR); identification of important issues and how information on them should be presented to shareholders; providing an external view of a company's relative performance on the issues; and relationship building.
First, engagement gives investors the opportunity to emphasise that good and responsible management of environmental and social issues is important. This may sound a simple and rather modest objective. One might think that with all the 'noise' around CSR, all the stories in the media, all the campaigning at AGMs, and all the CSR reports being published, this message is unnecessary and even redundant. I disagree. There are relatively few major shareholders who express affirmative interest in CSR issues. In addition, many companies that have gone to great effort to report on their CSR programmes get little reaction from their large shareholders. They then question whether shareholders are really interested in this information. If companies are expected to be accountable and transparent on CSR, shareholders must demonstrate their interest by providing constructive comments and suggestions on the way that these issues are managed and described.
Second, discussions with investee companies enable fund managers to identify the issues in which they are most interested and the manner in which those issues are best described in company reports. Companies are producing CSR reports for a variety of audiences, including nongovernmental organisations, campaign groups, employees, shareholders, and communities. Each of these has a special interest in particular information and how it is presented. For example, when we research companies for the Standard Life Investments' ethical funds we wish to know whether companies operate in countries with poor records on human rights in order to determine whether they pass the human rights criteria of the ethical policy governing the funds. However, as part of our programme to incorporate the consideration of environmental and social issues in our mainstream investment process, we also want to know what policies companies have for managing the risks that arise from operating in such countries, and how these policies are implemented and monitored. When we meet with companies we can specify what we would find helpful in our analysis. Our Statement of Principles and Policies (see box) explains how we evaluate the human rights policies and practices of the companies in which we invest and provides a basis for discussion.
A third benefit of engagement is that it gives fund managers the chance to express a view about how a company's management of CSR issues compares to others in their sector. It can prove extremely motivating to hear an external view of a company's relative standing against its peers. Sector leaders will find it rewarding that they have been identified as best in class, and their continued leadership is thereby encouraged. The laggards, on the other hand, will learn that their lack of attention to CSR has not passed unnoticed.
Finally, discussions between investment managers and company management provide the opportunity for building good working relationships. Most of us are influenced more by the people we know, respect and trust. Relationships between shareholders and companies are no different. We must invest time and effort to develop these relationships, but significant benefits often follow when company managers seek our views and advice in developing their CSR strategies. We believe our ability to influence is maximised in the context of such relationships.
In general, our ongoing relationships with company management, in which the discussion of CSR issues is but one part, underpin the robustness of our investment process. Our style of active engagement is designed to avoid, as much as possible, surprises which have the potential fundamentally to change the standing, strategy or dynamics of the companies in which we invest.
In a sceptical world it is natural for people to ask for evidence of the effectiveness of an engagement strategy. There are good reasons that fund managers should report to clients on the number of meetings they have had and the nature of issues raised. I question, however, the pressure to list the results achieved at particular companies. Quite apart from the confidentiality that often attaches to fund manager-company discussions, which makes disclosure a serious threat to continued effectiveness, is the difficulty in determining exactly which interaction caused a company to change a policy or practice.
To borrow an analogy from my days as a trial lawyer, it may be appropriate for an individual lawyer to claim victory when a judge or jury, limited to the evidence presented in the courtroom by the lawyers for both parties, has decided his case. The judge and jury are not permitted to consider information from any outside source, to read newspapers or listen to television commentary, or to discuss the case with anyone else. But when companies make decisions they certainly can and do consider the drift of public opinion and the views of the media, regulators, industry associations and various stakeholders. It is the combined influence of all of these that has produced results. Each shareholder, stakeholder and commentator expressing a view has made a contribution to influencing company practice. Exceptional circumstances apart, it seems unrealistic to believe and inappropriate to assert that the intervention of one fund manager on its own has made the difference.
In conclusion, in my view engagement is an effective tool. With most forms of human interaction, the ability to be influential depends on a host of factors, including the attitudes of both parties, the merits of the arguments made, and the ability of the individuals involved to advocate their positions clearly, rationally, and persuasively. This is also the case with engagement.
Principles and Policies on Human Rights and International Operations - A Note
Companies operating in or sourcing goods from countries with a record of human rights abuse are exposed to risk towards the safety of their staff and operations and the possibility of action by consumers and non-governmental organisations that oppose commercial activities perceived by them to support oppressive regimes. We expect that companies operating in or sourcing goods from such countries will
- take affirmative steps to ensure that they do not violate internationally recognised standards on human rights and do not benefit from or use the products of others that do;
- adopt human rights policy guidelines for employees, contractors and suppliers and a programme for dissemination, training and managing compliance with such guidelines if they are operating in countries which have been rated poorly on civil and political liberties by internationally recognised authorities;
- meet internationally recognised standards on the use of security forces to protect their employees and property when operating in oppressive regimes; and
- report to shareholders in an appropriate manner on their human rights policies and practices.
Julie McDowell,
Socially Responsible Investment Research Manager
This article first appeared in Investment Week 9/6/03.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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