Shareholder engagement is more than going with the fund manager’s view, Nest's Mark Fawcett argues.
That is because environmental, social and governance risks are fundamental to the profitability and sustainability of corporations and, just like currency, interest rate and credit risk, are factored into responsible long-term investors’ risk management procedures.
Engaging with our fund managers is an effective way to influence significantly more stocks than we own directly
As investors and shareholders, we have a say on how companies behave. Our shares, like those of most other institutional investors, are largely held in pooled funds and usually voted by our fund managers.
But we do not think it is good enough to leave it entirely up to them. Our members’ interests are at the heart of everything we do, whereas our fund managers have multiple clients whose interests they must consider. So we actively engage with them on these issues to make sure they are taking our views into account.
To do that effectively, we work with proxy voting and analysis firm Manifest. With Manifest’s help we have identified a core subset of companies in our portfolio that present significant enough risks to be the focus of our attention.
These include our largest holdings, household names, companies with historic and ongoing governance issues or those that present thematic risks, such as utilities or energy companies.
Seeing where views differ
Our fund managers send us their voting intentions for each of these companies ahead of their annual general meetings. Manifest then help us check them against our voting policy and identify important areas of divergence.
This gives us the tools to engage in a meaningful way with our fund managers on voting decisions. Without these tools, or the commitment to hold fund managers to account, a significant gap opens up in the chain between shareholders and companies.
E, S or G: Which should schemes prioritise?
While there has been significant and increasing interest in environmental, social and governance issues among pension funds, there has not broadly been a corresponding increase in the nuance of integrating these factors in building and managing portfolios.
Engaging with our fund managers is an effective way to influence significantly more stocks than we own directly.
But we have also negotiated an override so we can vote directly on decisions where no agreement is reached. Where this happens, we will be writing to companies we have voted against to explain our decision and engage with them on those areas of risk. That is because voting is one lever to pull, but it is engagement and meaningful dialogue with investee companies that can lead to meaningful change.
In being active, Nest and its partners are sending strong signals across the investment chain that ESG risks are not a sideshow. They are a fundamental part of the overall investment picture.
Mark Fawcett is the chief investment officer of mastertrust Nest
