Has there been a difference in recent years in the way companies engage with you?
I think companies have become much more responsive to our feedback. In our industry, in the past it might have been transactional, they'd get sent an ESG questionnaire once a year and would tick boxes. Today they really appreciate how ESG considerations might impact their reputation, their employees and their share price. We try and encourage them to see ESG as part of the fundamentals of their business, that it's not a separate entity. You know it has gained in importance when boards create defined roles: a sustainability committee, a Chief Sustainability Officer or a direct reporting line of ESG to the board are all positive signs.
Often, our strategy has been a shareholder of these companies longer than the management has been in charge; a lot of the companies we own have been in the strategy since it launched in 2000. That speaks to the longevity of our brand. Companies know our feedback is not about short-term profit, but really about long-term development, both for the company and for the strategy and its clients. We have this aligned perspective.
Often, our strategy has been a shareholder of these companies longer than the management has been in charge.
What are the themes of the engagements in your portfolio?
Given our thematic nature, a lot of our engagements have quality of water provision at their heart. For the most part, these are company-specific engagements focused on utilities’ unique operating and regulatory environment. But we can also pursue broader ideas that apply across segments, with other teams. For instance, waste management and water utilities all have environmental challenges such as water effluent and carbon emissions. So we can have a cross-sector engagement on wastewater treatment in collaboration with the team managing the Global Environmental Opportunities strategy, where we can say "Why are your effluent violations at this level, when your competitors are much better?" It's a way of pulling everyone up, in a sense.
Environmental and social aspects are obviously incredibly important but a unifying theme for us is governance because it is the avenue through which good environmental and social practices take place. When the management’s philosophy and approach are aligned with employees and shareholders, that often trickles down through the rest of the organisation. Getting management to align their compensation with science-based environmental and social targets, for instance, is a way of making sure the C-level pays attention.
The social element has grown in importance with the pandemic. Employers now value human capital more – and we see with labour shortages now that people value themselves more. We have been very aggressive in voting against management compensation where they have benefited at the cost of temporary headcount reductions. We want to make sure that our companies think and act as responsible employers with a long term perspective.
Can you share examples of engagement?
A lot of our engagements take years and are still ongoing. But one example is with a very large multinational company that operates concession models and sells industrial water products globally. Effective oversight is difficult on this scale. They were involved in environmental and social controversies and we perceived a lack of desire to focus on sustainability. We engaged to change oversight at the board level and encourage the use of sustainability metrics in management compensation, to create alignment. About a year and a half later, they released what we consider a best-in-class sustainability-linked compensation package, relying on many metrics related to SDGs to inform compensation. Of course we can’t take sole credit, we were part of a broader discussion involving many shareholders.
One of the greatest challenges is that no one size fits all. That's why I find it so valuable to be both the manager in charge of investing in these companies and the person looking at the ESG side. You could have a rule that says, "We apply a 10-year threshold for independent directors on the board". But if one of the board members has unbelievable experience in microbiology at a life science company that cannot be replicated, we're happy to waive that threshold. Having an understanding of the fundamentals of the company is very important in forming the ESG engagement, and vice versa. Engaging in ESG informs your investment perspective.
What could lead you to divest?
We never set out for an engagement to end in a divestment. I see it as being part of our mandate as an impact investor to continue to hold stocks and to push for positive change. Additionally, we do enough due diligence prior to investment to have the conviction that our investments are long-term holdings throughout most environments. But of course we watch how things evolve. We gauge management's willingness to respond to external factors and to our input. We will engage, vote against the board in AGMs, write letters and have conversation with the board members. But if we see no change and perceive there to be a large risk, we will divest.
Are clients asking more ESG questions?
It certainly does come up more. We've always been very transparent about the way ESG feeds into our investment process and philosophy so that's well understood by clients in the strategy. But we get more requests about the types of engagements we've been doing, whether it's the E, S or G, whether it's related to controversies, business strategy or SDGs. There is more interest in the fundamental impact that we can have as investors.
I see it as being part of our mandate as an impact investor to continue to hold stocks and to push for positive change.
To find out more about corporate engagement at Pictet Asset Management, read our Responsible investment report.
