How does an asset manager like Schroders actively influence the companies it invests in?

In the debate over whether investors can encourage a more sustainable recovery, the role of active ownership is key.

There is a growing momentum behind ESG investing – investing which considers environmental, social and governance factors. 

Active asset managers can influence the companies they invest in through engagement, as well as gaining a deeper understanding of the risks and opportunities they face.

With the increasing focus on how investors can be catalysts for change, Elly Irving answers our questions.

So how do active investment companies like Schroders actually engage with firms?

Elly explains that there are lots of different methods of engagement. “It’s necessary to have dialogue with companies over their practices, whether it’s a phone call or a one-on-one meeting.

“We meet with company management and specialists over specific issues. We go on site visits, join investor meetings and organise our own events, for example to engage with non-executive directors over our research processes.”

There has to be some prioritisation, and Elly says: “There are number of ways that we can think about that, but firstly its process-driven, so perhaps a drop in an ESG-rating or explaining where we’ve voted against management, or it could be driven by our thematic research.”

Examples of areas of thematic research the team has undertaken include plastics, sugar and climate change.

Elly notes that it can also be beneficial to work with other asset manager peers to combine percentage holdings in a company where that company has not responded to investors’ nudges. With a collective voice it is easier to influence a company or encourage them to provide more disclosure.

“Two recent examples of that are our involvement in Climate Action 100+, looking at climate change risks, and our involvement in The Workforce Disclosure initiative, which is trying to find better disclosure on human capital practices within businesses,” she adds.

Where and how frequently does Schroders engage with firms?

Elly says that over the last five years Schroders’ engagements have increased substantially.

“Five years ago we were engaging with 243 companies and now we’re up to more than 2,000. We’ve also become much more global in our engagements. Five years ago only 18% of our engagements were outside of Europe. Today that’s 55% of our engagements,” she says.

So Schroders’ reach has become much more global.

She explains how there is a two-pronged strategy for engagements: “Either fact-finding or really trying to influence company practices.”

Can you talk us through a current fact-finding engagement – what about oilfield services and carbon emissions?

Companies in the oilfield services (OFS) sector generate more than 90% of their revenue from oil and gas production. They generally provide equipment or services for the petroleum exploration and production industry, though do not usually produce it themselves.

While a lot of media attention focuses on those that extract and produce fossil fuels, the impact of this sector cannot be ignored.

Elly says: “In the final quarter of 2019 we turned our attention to the OFS sector and its path to carbon neutrality. With Schroders’ European equities team, we sought to understand how these companies were thinking about the low carbon transition. What were their current or planned efforts to expand in the renewable energies and low carbon space? How adaptable are they?

“Interestingly, some suggested offshore wind construction and engineering would be less complex than their existing oil and gas equivalent. However, only a few had set targets on capital expenditure, revenue or research and development.”

Elly says: “We’re expanding this engagement project to compare findings across different geographies. Gathering information through different lenses deepens our understanding and supports conclusions drawn by our analysts, fund managers and – in turn – investment decisions”.

Can you tell us how you have employed these strategies with regards to sugar?

Schroders started a fact-finding engagement on sugar, which it had identified as an emerging risk, in 2015.

“We thought there may be a risk to company earnings due to changes in consumer behaviour, and also an increasing focus from regulators and public health bodies around growing obesity and diabetes,” Elly explains.

She says: “What we found was we just didn’t have enough information to determine which companies had a bigger ‘sugar footprint’. We couldn’t tell which ones were investing research and development into low-sugar alternatives.”

What did the sugar engagements achieve?

Elly says as a result of the team’s research and dialogue, expectations were agreed.

She says: “Now we can better quantify and understand sugar risk. We had that peer reviewed by a number of academics, non-governmental organisations, and public health organisations. Then we engaged with companies on the basis of our expectations.”

She adds: “We reached more than 55 companies globally. At the beginning of the year we saw very positive progress in companies reporting against our expectations.”

Given the new perspective on obesity and health that the coronavirus crisis has imposed on policymakers, it seems inevitable that sugar consumption will come under increasing government scrutiny.