In late January, WWF, formerly the Worldwide Fund for Nature, announced that it is tabling a resolution at BP’s April annual general meeting. The resolution calls for the oil and gas giant to report on how it “analyses and minimises risks to its business from operating in sensitive areas” – with an eye to BP’s exploration plans in the Alaska National Wildlife Refuge.
The resolution has little chance of winning support from the majority of shareholders. But it will be supported by a number of institutional investors, including leading US ethical funds and continental European institutions.
Such resolutions are the tip of a growing iceberg. Institutional investors are increasingly using the influence that their shareholdings bring to press company managements on social, ethical and environmental issues.
But this influence isn’t just being exerted in public. A growing number of European pension funds and asset managers are now adding a specifically environmental and social dimension to regular contacts with company management. Some are also trumpeting their ‘engagement’ policies, either in response to what they consider the values of their beneficiaries, or as a means of ‘adding value’, and differentiating their service from that of competitors.
“We always hope that it’s adding value for shareholders,” says Fiona Cuthbert, company analyst at Morley Fund Management, the asset management arm of UK insurer CGNU. “But it also adds to our brand image.” Morley began an engagement programme at the end of 2000, applied to its £220bn (E361bn) in assets worldwide.
Its programme covers human rights, toxic materials, climate change, equal opportunities, and health and safety. “We always need a business case: it makes Morley’s fund managers listen, and it makes the company listen.”
The roots of engagement lie in the growth of shareholder activism in the US in the late 1970s and 1980s, when ethical investors used their holdings to protest at US companies active in apartheid-era South Africa.
Environmentally and socially concerned investors followed. Firms like Boston-based Trillium Asset Management, founded in 1982, saw that owning a stake in a company gave them the ability to attempt to influence its policies, practices and even business strategy. This contrasted with the approach of many ‘ethical’ investors – simply refusing to invest in companies whose activities didn’t mesh with their ideals, leaving no avenue for dialogue.
In the late 1990s, the growth of private pension provision in Europe, and a growing concern among fund beneficiaries about how their money is invested, generated a corresponding growth in socially responsible investing (SRI) on this side of the Atlantic.
But the SRI movement in Europe has taken a different course to its US equivalent. Social investors in the US have traditionally accepted the possibility of lower returns in exchange for portfolios that reflect their values. In Europe, the idea has taken root that corporate irresponsibility is a risk issue – and one that threatens shareholder value.
“Our main objective is to increase returns,” says Ellen Habermehl, communications consultant at PGGM, the Dutch pension fund for workers in the healthcare and welfare sectors, with e52bn under management. “If sustainable investing cost us money, we would stop. But we very strongly believe that having a dialogue with companies will increase shareholder value.”
Indeed, environmental and social issues can clearly hit the share price of companies: as well as the obvious costs of environmental clean-up or legal action, firms as disparate as Monsanto, Nike and ExxonMobil have seen their reputations hit by a failure to assuage the concerns of investors and customers, respectively over genetically modified food, labour standards among suppliers, and opposition to measures to tackle climate change.
The trend towards engagement has been accelerated by government policy. Since July 2001, the UK’s Pension Act has required pension funds to disclose the extent to which social, ethical and environmental issues are taken into account in investment decisions. Similar legislation has been enacted, or is under consideration, elsewhere.
In the UK, most pension fund trustees have, following the advice of their consultants, turned to engagement to show that they are addressing these issues without having to take the more radical step of shifting assets into SRI portfolios. Preliminary results of a study carried out last year by Prabhu Guptara, of Switzerland’s Wolfsburg Institute, found that over 90% of UK pension funds surveyed said they now require their investment managers to carry out an engagement strategy.
In 2000, for example, UK asset manager Friends Ivory & Sime introduced what it calls its Responsible Engagement Overlay (REO) to its entire portfolio – to its ‘mainstream’ mandates as well as to its SRI funds. It also offers REO as a standalone service. PGGM has commissioned FIS to apply REO to its E5.5bn European index-tracking portfolio, as a pilot project and its first foray into SRI. “We’re very enthusiastic about the way FIS works – there’s a good chance we’ll extend it to our US portfolio,” says Habermehl.
Institutional investors are teaming up on campaigns, both to prevent the duplication of effort and to carry more weight in their dealings with companies. In the Netherlands, for example, VBDO, the Association of Investors for Sustainable Development, counts the country’s ethical funds, as well as ‘mainstream’ funds such as PGGM, ABP and the asset management arm of Rabobank among its members. Executive director Piet Sprengers says VBDO concentrates on increasing the transparency of Dutch listed companies, encouraging them to produce sustainability reports.
A small number of pension funds – usually those of public sector workers, or those such as trade unions with an explicit social agenda – carry out engagement strategies in-house.
The UK’s £20bn Universities Superannuation Scheme, which manages the pensions of over 170,000 university staff, has a strategy designed to cover its entire portfolio every five years, as well as addressing ad hoc issues as they arise.
However, Raj Thamotheram, senior adviser for socially responsible and sustainable investment at USS, says limited resources mean they are focusing on sectors with high social and environmental impacts, and where there is a wide divergence of performance among companies. Last year USS focused on the pharmaceutical sector, where issues surrounding affordable access to HIV drugs and basic healthcare posed a reputational threat – and thus a financial threat – to companies.
But what do the recipients of such ‘engagement’ think of the process? “The response from the vast majority of companies is positive,” says Cuthbert at Morley – particularly given that Morley typically owns 2–3% of large UK firms, and that concerns are raised at meetings alongside Morley’s ‘mainstream’ fund managers. She singles out the response from Cadbury-Schweppes to concerns raised last year about labour conditions in west African cocoa plantations. “They were very responsive, and very open to our feedback.”
“We haven’t had any ‘go away and don’t bother us’ responses,” says Thamotheram. “But we have a careful process where we choose what we engage upon.”
This is where the ‘behind-the-scenes’ engagement approach differs from the campaigning tactics of environmental and social organisations.
Last year, Greenpeace activists criticised the failure of leading providers of SRI funds to support another resolution tabled at BP’s AGM. This called on BP to set out how it planned to move ‘beyond petroleum’, and change from a business based on exploitation of climate change-causing fossil fuels to one focused on ‘sustainable’ energy.
Soon after the April AGM, Steve Waygood, an FIS analyst, said that while supportive of the resolution, his firm couldn’t back a requirement that BP set out targets on how it would exit the fossil fuel business – a process that FIS estimated would take 50–100 years, beyond the realms of realistic business planning.
But when the concerns of investors are more closely aligned with a company’s own business, the relationship tends to be more fruitful. Last year, management at UK pharmaceutical company GlaxoSmithKline acknowledged the influence of institutional investors in highlighting, and encouraging it to address, the controversy over developing country access to drugs.
And engagement campaigns often encourage companies to tackle inadequacies in their environmental or social policies – or even simply to more effectively communicate their positions on sensitive issues. For example, Balfour Beatty, a UK-based construction and engineering firm, faced attacks from activists over its involvement in the consortium building the controversial Ilisu dam in Turkey (it left the consortium last November). As part of the campaign, Friends of the Earth tabled a resolution at last year’s AGM demanding that it adopted the recommendations of the World Commission on Dams.
The resolution garnered only 3% of votes cast, but in the run-up to the AGM, concerned institutional investors privately raised the issue with Balfour Beatty. The firm said it had not changed its policies but that the issue made it articulate its position more clearly.
It’s difficult to quantify the extent to which engagement policies add shareholder value – and impossible for any one investor to claim that its intervention was pivotal in changing a company’s approach. But, given that company executives and institutional investors have a convergence of interests – increasing a company’s value – the trend towards greater dialogue is broadly supported. And, given the ever-larger amounts of assets behind such campaigns, it’s clear that the urge to engage isn’t going away.
Mark Nicholls is editor of Environmental Finance magazine

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