The case for active engagement to achieve ESG goals

As fashion brand Boohoo addresses labour rights issues in its supply chain, Nestlé considers the nutritional value of its product range and JD Sports receives heated criticism of its chair’s £4.3m bonus, shareholder voices are being heard loud and clear.

Incorporating environmental, social and governance themes into corporate strategy

Active owners and lenders are engaging with companies more frequently and in more ways than ever before. Stewardship and active ownership reports detail dynamic engagement throughout the year, illustrating how asset owners drive the incorporation of environmental, social and governance themes into corporate strategy and monitor progress against increasingly ambitious targets.

The linking of ESG success to executive pay and long-term remuneration plans has become a handy incentive to encourage material progress. The Pay Governance survey from January 2021 showed that 90% of surveyed companies in the UK and European Union included ESG metrics in their executive compensation plans.

The debate between active engagement and divestment rumbles on. Increasingly seen as a last resort, divestment removes any leverage the shareholder may have to effect positive change. More cynically, it might also cut off a potentially lucrative income stream.

Active shareholder engagement

The case for active engagement has heavyweight backers, notably Japan’s Government Pension Investment Fund, the world’s largest pension programme with $1.36tn of assets under management, and Norway’s Government Pension Fund Global. Blackrock, along with a swathe of major investors, is a signatory to Climate Action 100+, an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

Climate Action 100+ Steering Committee Chair and OMFIF Advisory Council Member, Anne Simpson, praised the ExxonMobil shareholder vote in May 2021 to replace two of the oil major’s board of directors with candidates experienced in clean energy and energy transitions. Simpson said, ‘Investors are no longer standing on the sidelines. This is a day of reckoning. The votes for change by Climate Action 100+ signatories show the sense of urgency across the capital markets.’

Assuring high standards of ethical conduct

Multilateral development banks, funded by states and other multilateral institutions who require assurance on high standards of ethical conduct, are also taking an increasingly active stance. Integrity compliance programmes help protect their financing projects from corruption risks as well as reputation-damaging misconduct.

Increasingly, we see proactive organisations demonstrating their commitment to ESG with clear reporting on reduction of environmental impacts, water usage and emissions. There are also efforts to tackle social and governance issues such as diversity, bribery and corruption and human rights.

Deploying best practice in ESG management

A tailored ESG assessment framework, drawing on best practice from a number of sources, including the Global Reporting Initiative, Task Force on Climate-related Financial Disclosures and GoodCorporation integrity and corporate responsibility frameworks, can help companies identify their material issues and set measurable targets towards solutions and/or mitigation. Additional benefits of an active approach include staff motivation and productivity, customer engagement leading to better sales prospects, suppliers developing policies that respect the environment, worker welfare and many more.

Internal and independent third-party assessments provide verification of substantive embedding of good ESG practices throughout a group’s operations, giving confidence across its shareholder base that it is committed to a sustainable, value-enhancing strategy.

This article first appeared in the August issue of the OMFIF Sustainability Journal. OMFIF is an independent think tank for central banking, economic policy and public investment.