Carrot over stick! Divestment risks putting the brakes on positive real-world outcomes

By: Jason Liddle, head of Distribution at Sanlam Investments

There is a growing awareness among asset managers and investors that the all-or-nothing approach of divestment or withholding investment capital might hinder rather than accelerate progress towards meaningful real-world outcomes like the just transition to net-zero carbon emissions. Ongoing active stewardship of company executive teams, and investors’ diligent exercise of their proxy voting rights, can yield far greater results insofar as changing company’s environmental and social (E and S) behaviours rather than merely excluding them financially.

Does it make sense to simply divest from companies that fall short of desired environmental, social and governance (ESG) measures? This is an ongoing debate within the asset management community. The latest thinking is that exiting a position in a company should be the final, nuclear option to drive change. And the consensus is that the ‘divest or not’ question should be rephrased as: At what point can engagement outcomes be abandoned after meaningful dialogue, the diligent use of escalation triggers and voting action – ultimately leading to divestment? Perhaps, asset managers should first leverage their influence (with other asset managers collaboratively) to encourage better real-world outcomes at investee firms before contemplating drastic financial steps.

From a South African perspective, engagement and active voting with investee firms’ boards – remain the most impactful way to achieve positive real-world impact and outcomes – in particular environmental and socially (E and S) driven agendas are often overlooked. There are three ways in which asset managers and investors can maximise their shareholder activism ‘windfalls’ in coming years.

1. Drive further emphasis on E and S issues

Recent studies confirm a wide divergence in how asset managers address critical E and S issues through proxy voting, with the United States falling behind its peers in the United Kingdom and Europe. Unfortunately, South Africa is behind the curve too. I have seen some growth in shareholder proposals relating to climate policies and social issues over the past three years, but local asset managers need to pay more attention to financially material E and S issues. I would like to see stronger focuses on the climate agenda (lowering carbon emissions), particularly in driving the just transition and biodiversity, and on improving board quality through a diversity of experience, gender, race and skills. Increased investor awareness and policy, along with better disclosure practice and compliance to reporting frameworks from investee companies, will enable more positive and dynamic E and S agenda outcomes.

2. Use technology to improve shareholder activism

The rise in the number of virtual shareholder annual general meetings that came about due to the COVID-19 pandemic makes it easier for asset managers and investors to engage in shareholder activism – however challenges do remain.

Collaboration can foster stewardship activities to open engagement with board of investee companies in a more fluid and scalable fashion. Attendance levels at company AGMs have also increased due to being more accessible through virtual platforms.

Increasingly accommodative corporate governance codes, access to improving technology like e-voting, better shareholder identification practices and safer cyber-security protocols spur the rise of virtual forums. While these promote arguably easier and more efficient interactions, the dynamism of an in-person engagement, dealing transparently with larger volumes of posed questioning and maintaining levels of trust with the shareholder collective must not be compromised.

3. Complementary focus in investment processes, governance and reporting

There is growing evidence to support that active engagement, combined with a sensible approach to proxy voting, can achieve real E and S change, with asset managers able to leverage their influence and shareholdings to improve the board’s focus and attention to better profitability and impact outcomes. Complementary investment of discipline, time and expertise in our investment processes (integration, data, technology, research), reporting and governance areas toward global best practice is crucial.

Our recent study of 2021 proxy voting  shows that investors voted against 10% of all resolutions under categories such as access to capital; audit; corporate activity; directors’ re-election and/or remuneration; and others. This means there is plenty of scope for local asset managers and investors to get more involved in standing against resolutions that divert from ESG outcomes, especially if they follow the lead set by the global investment community.

The second annual Robeco Global Climate Survey (Q1 2022) confirmed that 80% of global investors believe that active stakeholder engagement should be a significant part of their investment policy, with 72% indicating that such engagement was “quite or very effective” in fostering change and progress on ESG policies at investee firms. While not at these heady levels, the annual Sanlam Benchmark Survey among local client and investor base emphasised an improving appreciation of this over time.

Disclosure

Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”) and Sanlam Asset Management Ireland (“SAMI”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF)(Pty) Ltd (“SCI”) and Satrix Managers (RF)(Pty) Ltd (“Satrix”).

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