Incorporating ESG Considerations into Engagement Practices
KKS Advisors & High Meadows Institute / December 2016
Chris Pinney, Sakis Kotsantonis, Laura Kramer, and Joe Lewis
Engagement – interactions between investors and current or potential investee companies with the goal of improving their practices– has been employed by many investors as a core tool of their stewardship programs. Although engagement encompasses many different strategies and approaches, and covers a wide range of topics including executive compensation, strategy and risk management, our focus is engagement on environmental, social and governance (ESG) issues. The idea that engagement can potentially lead to improved performance on the topics of the engagement, and overall mean better returns, is fast gaining acceptance. This has led to a significant increase in engagement efforts, both private and public on ESG issues.
For the purpose of this report we examined both private and public engagement practices. Private engagement is the route used most often by the majority of institutional investors. This can be in any form from emails, letters, phone calls and in person meetings with company managers. In order to shed some light on private engagement practices we interviewed Jem Hudson, Vice President, Credit Research at Breckinridge Capital Advisors and Michelle Edkins, Managing Director & Global Head of BlackRock Investment Stewardship, both members of the High Meadows Institute Forum. Public engagement on ESG issues has been on the rise, with the numbers of ESG proposals doubling between 1999 and 2013. Despite their increasing numbers though, voting in favour of ESG related proposals has stayed consistently below 25% on average since 2010, short of the 30% threshold at which a company is expected to consider the issue. In this report, we present a very interesting case study of public engagement by highlighting contrasting results in the oil and gas sector by comparing similar proposals received by ExxonMobil, Chevron, BP and Shell and the very different management responses and investor voting outcomes.