Stewardship in the spotlight: Collaborative engagement

This insight was originally produced by WHEB Asset Management, now part of Guinness Global Investors.

‘Everything, everywhere, all at once’

... was the phrase UN Secretary General António Guterres used at the launch of the sixth IPCC synthesis report¹. Rather than referring to the Oscar-winning multiverse fantasy film, Mr. Guterres was - rather soberly - describing the level of climate action needed for a chance of limiting global temperature rises to 1.5 °C.

In 2022, the investment industry leveraged collaborative networks to push for sustainability agendas more than ever before². However, achieving market transformation will require sustained, collective efforts from an alliance of investors as opposed to any single entity.

Collaborative advantages

In our previous blog in this series, we outlined how stewardship is a fundamental component of WHEB’s investor contribution³. Collaborative engagement is an important tool for institutional investors to influence both portfolio companies and the financial system as a whole⁴.

Where asset managers or owners collaborate with other investors to engage an issuer to achieve a specific change, or work as part of a coalition of wider stakeholders to engage on a thematic issue’⁵, there can be advantages over doing so bilaterally. This is because:

• Investors may enjoy enhanced power, legitimacy, and urgency as their collective weight behind a unified message can be more difficult for company management to ignore. This is especially helpful as an escalation tactic where previous attempts to engage or effect change when firms are acting individually have been unsuccessful. We have found this to be a particularly effective approach when previously discussing net zero carbon targets with Intertek alongside another investor.
• Collective expertise and research can be shared and developed amongst group members, supporting knowledge and skills sharing, with wider-ranging effects beyond the scope of the engagement. For example, WHEB has benefitted greatly from the expertise of ChemSec when engaging on hazardous chemicals in an initiative that has effectively combined the NGO’s technical knowledge with the clout of a number of institutional investors.
• Efficiency gains can be achieved where companies are collaborating and would have otherwise engaged the same company separately. This avoids duplicating work (for both investors and issuers) and potentially costs, as was the case when we engaged Aptiv on labour standards alongside another investor.

In recognition of the effectiveness of collaborative engagement, formal networks, such as the PRI, IIGCC, IIHC, and CA100+ as well as others WHEB is a member of⁶, have developed infrastructure to support and facilitate long-lasting dialogues⁷. They also encourage investor feedback into public policy, such as the FCA’s Sustainable Disclosure Requirements (SDR)⁸, which seeks to improve the consumer's ability to navigate sustainable investments.

Balancing direct and collaborative engagement

In certain instances, it's more practical for investors to communicate with a company directly. As a long-term investor, we have established good relationships with companies held in the strategy. We often prefer to raise material topics directly, especially where immediate action is required as was the case most recently when we were alerted to a controversial animal labour issue at portfolio company, HelloFresh. We can then escalate via collaboration or other methods, if required

When collaborating, coordination and preparation are crucial for enabling an effective engagement. Researching and agreeing a shared understanding of the topic and the associated business case with the group as well as identifying stakeholders and deciding on objectives and methods can take significant time and resource.

Collaboration also poses challenges⁹, for example when groups involve many investors there is the risk that some members benefit without contributing. Large diverse groups may scale-back objectives to achieve consensus, resulting in frustrations or even reputational risks for more ambitious members. Regulatory uncertainty has also limited German investors’ participation in initiatives like CA100+, over fears the collaboration would be in breach of ‘acting in concert’ and therefore breaching competition rules¹⁰.

Our approach to collaboration

Bearing the above factors in mind, we consider collaboration to be an essential element of our stewardship approach and try to apply the following general principles in order to effectively influence both portfolio companies and the financial system as a whole:

1. Our engagement focuses on issues or topics that are material at the company or strategy-level.
2. Collaboration is an effective escalation tool particularly where investors share a similar philosophy and approach. Collaboration can also enable sharing of relevant insights between participating investors.
3. We prioritise quality over quantity and strive to be active participants in collaborations by leading or co-leading, providing analysis, opinion and pushing for timely responses from company management and other stakeholders.

¹ https://www.theguardian.com/environment/2023/mar/20/ipcc-climate-crisis-report-delivers-final-warning-on-15c
² https://esgclarity.com/mounting-pressure-start-of-sustainable-investing-2-0/
³ This is outlined in more detail in WHEB’s model of impact investing in listed equities: https://www.whebgroup.com/investing-for-impact/about-impact-investing/our-perspective
⁴ Enterprise level investor contributions: where we can have a direct impact on companies for example, through stewardship activities such as engagement with companies and proxy voting at AGMs. Systems level investor contributions: refers to engagements aimed at the wider financial system that indirectly support positive impact businesses
⁵ https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Dec-19-Final-Corrected.pdf
⁶ Principles for Responsible Investment (PRI), Institutional Investors Group on Climate Change (IIGCC), Investor Initiative on Hazardous Chemicals (IIHC), Climate Action 100+ (CA100+). Please see more https://www.whebgroup.com/about/our-industry-networks
⁷ https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=3f6dc62eff30bda8a8ce729d15f78479bad580c2
⁸ WHEB’s view on the FCA’s proposals for Sustainable Disclosure Requirements (SDR) https://www.whebgroup.com/our-thoughts/whebs-view-on-the-fcas-proposals-for-sustainable-disclosure-requirements-sdr
⁹ https://www.frc.org.uk/getattachment/de8c91f5-c2cb-4b8b-9a98-34c31f382924/FRC-Influence-of-the-Stewardship-Code_July-2022.pdf
¹⁰ https://www.responsible-investor.com/german-government-advisory-group-advances-plans-for-collective-engagement-platform/