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Erika van der Merwe (EM): Investors have grown to recognize the importance of having a say in how their capital is used. It's generally recognized that when it comes to truly sustainable investing, investors have to apply all the tools and clout at their disposal to reach the best outcomes. Engaging with companies and even governments is a vital component of wielding influence for good.
Well, we've invited three of Robeco’s engagement specialists to explain what it's all about. So, welcome to Laura Bosch, Robert Dykstra and Daniëlle Essink. Good to have you here.
Robeco is clear about its philosophy of being an active manager. Given this approach, how would you say clients benefit from engagement?
Laura Bosch (LB): So I think it's useful to start with the question: what are we talking about when we talk about engagement? And really the idea is that we as investors try to influence our investee companies through dialogue, really trying to make them embed more sustainable business practices. And the idea there is to help them to mitigate risks or to seize opportunities. So once companies become more sustainable, there are also spillover effects, at the society in general, because they have impact on local communities and the environment where they operate, but also for other stakeholders like investors. As we are investing in companies that actually achieve an impact through their business practices and the way that they sell their products in the market. But it also helps us how to improve the risk-return profile of the companies that we select in our portfolios. And this is specifically important if we take a look at it from an active management approach, because we can also use the insights we get through engagement in the way that we assess companies in our investment valuation cases. And it helps us to allocate capital to those companies that are actually more sustainable. But it's also a tool that we can use in order to decide if we want to remain invested in a company or not, looking at the practices that they have and how they respond to engagement. So we have this powerful tool, this divestment, to actually decide whether companies have gone too far in terms of embedding the assets that we put forward in our engagement or not, and then decide how we want to respond through our capital-allocation strategies.
EM: That really sounds like the ‘active’ in ‘active management’. Daniëlle, you as a company, you're explicit about favoring engagement over exclusion. And now we have seen in the asset management industry globally that such an approach can be controversial. There are some big names out there receiving quite high-profile criticism on this. And many argue that they should be far less accommodating about those who don't come into alignment. So what's the point at which you as a team make the decision to transition away from engaging towards exclusion?
Daniëlle Essink (DE): Well, as Laura pointed out, there is a lot of benefits to engagement. So for us, indeed, it's a last resort. We prefer not to go to the exclusion because we lose both the influence on the company level, but also potentially the societal positive impacts. And we also feel that companies really have an opportunity to change when something bad happens. Let's say there's an environmental spill. Many companies are really willing to clean that up and make sure that that doesn't happen in the future again. But there are exceptions where we try to engage with companies, reach out to them multiple times through multiple channels, and they are really not responsive to our engagement, but also not the broader societal engagement to truly not just us concerned about these issues, but maybe there is NGO, civil society, organization, governments. And when companies are really not willing to move, willing to improve their practices and we don't get that seat at the table, there will be a point where we have to decide that exclusion is our last resort.
Robert Dykstra (RD): And just to add to that, I think historically we've excluded a lot based off of incidents or because of global compact breaches following all these different frameworks. We're also moving to a place now where we're basically excluding on the basis of our engagement on a thematic area. So we've also recently launched an acceleration to Paris engagement program, which highlights 15 climate laggards that are also on the chopping block, so to speak.
EM: So, so really some very clear and firm guidelines that you have in place to facilitate that process as you transition from engaging to exclusion. When it comes to engagement, I'd imagine that you're dealing with some very subjective concepts and goals, even though you might have, as I've just said, some clear, explicit guidelines. Robert perhaps to put this to you. What does success look like in engagement? How do you help yourself make it truly tangible?
RD: Yeah, it's a tricky question and something that we cater to each specific engagement case to see what success would look like. But I think you can see it from two different angles. Right through engagement, we're often looking to mitigate some kind of negative externality that is associated with the company. But we're also looking to enhance or accelerate the positive contribution that a lot of these companies have. So on the negative side, you know, oftentimes those are the cases that get highlighted. Think about, you know, filing a shareholder resolution that substantially changes the company's behavior or disclosures, potentially getting a nominee to the board. But oftentimes, the successes on the positive side of engagement often go a bit unheard of. And, you know, some people say that engagement is a bit of an art. So as you mentioned, the success can often be subjective.
EM: And just on that point, do you celebrate those successes?
RD: Yeah, absolutely. But we also don't want to push ourselves as being too successful of an engagement theme. You know, we don't want to toot our own horn because we also have to be critical of ourselves, of the work that we do and of what the actual impact is of the engagement that we have. I think, you know, we don't want to contribute to the, let's say, inflation of engagement value.
EM: Now climate and the environmental are central to your engagement themes as we've seen in recent years. Let's talk about this year's new theme of net zero and let’s be frank, the change needed for businesses and economies to become net zero really is fundamental. Do you truly believe that you will be able to enforce some of these huge steps through engagement? I mean, can you really move the dial here?
RD: Yeah. So this touches a little bit on what I just said around transparency and disclosures, because that is where we're at right now with these net-zero commitments. We ourselves have made one. I'm speaking to a variety of banks who've also made these commitments. And one of the issues here is really keeping tabs on the short and medium-term targets that need to be abided by to actually reach this net-zero trajectory, which is also being assessed in a multitude of ways. You've got different scenarios, trajectories and ultimately assumptions that have to be made to get to net zero. So what we're doing right now is really keeping tabs on this, not only internally, for ourselves, but also with others, and trying to collaboratively come to a place where we can develop these short and medium-term targets that are in line with net zero.
EM: Now perhaps using climate as an example, but even more generally, if it's generally relevant, if you look at the evolution of engagement over the years, would you say that it's changed from having polite, friendly discussions with companies about the changes needed from them, to now having a firmer tone of insisting on change, and perhaps applying much more of your own leverage or collective leverage. So where are we today in this, and where do you think we'll be in in a few years’ time?
RD: Yeah, I think that's a very good point. How the tone of engagements has changed over the years. You know, on the topic of net zero, if you go back five years ago, I think there was a bit of pleasantries surrounding the whole dialogue. But now that the outcomes and commitments have become clear, right, and we have a dot on the horizon in 2050, you know, we can also point the finger, without, let's say, leading to any conflicts because to some extent the data is there. You can see by 2030 who's going to be ahead, who's going to be behind and collaboratively, there's a lot more momentum. So we don't engage stakeholders or companies on net zero individually. We also do that collaboratively. And there's regulatory momentum there. There's NGO momentum, there's momentum from clients. So we try and coordinate that, ride the wave, add to it and ultimately reach that end goal.
EM: Laura, circling back to a point you made earlier. Now, as you develop your engagement programs, do you have sympathy for these businesses, for the enormous complexities that they face in having to manage expectations of so many different stakeholders? You've got those that insist on financial performance. And then at the other end of the spectrum, you've got the environmental activists with completely different priorities. So, do you keep that friction in mind when you speak to companies?
LB: Certainly, and we also hear that first hand from companies that they are really trying to, you know, tackle the expectation from many different stakeholders who have different views on what should be the direction that companies should take. And I think we need to bear that in mind as well when we have had discussions with companies. But in general you need those extreme views at both ends of the scale, to get the company to listen to the different tensions or directions, so they understand something needs to change and there needs to be internal reflection on how they approach specific sustainability challenges. And then having those both extreme positions also helps the companies to move towards a middle direction. And at least that gives us also some momentum on how we can give them feedback on what the best strategy they can pursue, to try to tackle some of the most pressing requests from stakeholders and make sure that they remain in business and they can improve their practices in the short to medium term.
EM: What about tension with stakeholders that might be at the same end of the spectrum, but perhaps you're not pushing quite as hard as the others. So, for instance, your approach versus some regulators or more radical activists who are wanting far greater and more extreme, faster change. How do you see your role as being different from theirs?
LB: Well, I think that type of tension is also really healthy because it enables us to reflect internally on our own engagement priorities, our own views on specific sectors. And we also take the opportunity to engage with these type of stakeholders, like NGOs, to better understand what type of stances we should be taking, we could improve. And also use their first-hand information on the ground that they usually have in some of the regions where they operate, and they might be more aware of human rights violations that are happening on specific plantations, and we take that on board as well in the way that we engage in dialogue with our investee companies. So I think it is also important to have critical friends that look at us and also keep us in check to make sure that we use their insights and their feedback to also improve the way that we view sustainability topics.
RD: Yeah, it's kind of an almost strange position to be in. You know, on the one hand, we're very diplomatic in that we're coordinating all these different stakeholders, but we're also privy to criticism from NGOs and shareholder activist groups ourselves. And, you know, we maintain an open relationship with a lot of these organizations because as Laura mentioned, they're such a valuable source of information.
EM: We’re going to change tack. It's time for our quiz. I've put together some questions for you to test your sustainable investing knowledge, which I'm sure is very deep. And I'm going to put the question to all of you. In each case, there'll be five questions, and as soon as you have the answer, just shout it out. So, are you ready?
Who is this speaker? And can you guess where he was speaking?
Male voice: “Nature is a key ally. Wherever we restore the wild it will recapture carbon and help us bring back balance to our planet…”
DE: David Attenborough!
EM: Great. Daniëlle guessed the speaker. Where was he speaking, Robert?
EM: Indeed, Sir David Attenborough, speaking at the opening ceremony of COP26 in Glasgow. Onto the second question. You have responsible executive remuneration as one of your governance engagement themes. Name one example of an irresponsible remuneration practice that you've encountered.
LB: [company name omitted]
EM: Laura, can you elaborate in one or two sentences?
LB: Well, let's just say very large pay package.
RD: Right. And disconnect between pay and performance.
EM: We move on to the third question. Who is this well-known activist?
Female voice: Let this be the last time that a girl or a boy spends their childhood in a factory…
DE: Must be Malala.
Female voice: Let this be the last time that a girl is forced into early child marriage. Let this be the last time that a child loses life in war.
EM: Once again, Daniëlle is quick out the blocks with the right answer. That's Malala Yousafzai. She's an advocate for female education, amongst others. And here she was delivering her Nobel lecture. She won the Nobel Peace Prize. It was in Oslo in 2014 at the age of 17.
Sustainable investing, this is the fourth question, seems to be a world of bewildering acronyms and wordy publication titles. Now, do you know your acronyms? I'm going to put one to you. Let me read it in context. The IPBES Global Assessment Report on Biodiversity and Ecosystem Services reported that approximately 25% of all species on Earth is at risk of extinction by 2050, representing roughly 1 million species of plants and animals. So the acronym IPBES is short for what?
LB: I would say International Panel for Biodiversity and Environmental Services?
EM: I’ll give you half marks there. Robert?
RD: I don’t think it’s going to get better than Laura’s.
EM: Right. Well, believe it or not, it is ‘Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services’. I have so much sympathy for you in your job keeping track of these names and acronyms. Now on to the last question. Who is this person and which organization does she represents?
Female voice: “I believe that the global responsible investment community has a critical role to play with others, with business, government and civil society….”
DE: That must be Fiona Reynolds, former CEO of PRI.
EM: Daniëlle, you definitely are the winner of this quiz round. Indeed, that was Fiona Reynolds, who served as CEO for Principles for Responsible Investing, another acronym, ‘PRI’, for nine years, succeeded at the end of 2021 by David Atkin. Well done, all three of you.
Back to the more serious stuff. You've announced the new engagement themes for 2022, adding to your existing series of engagement themes. How did you go about choosing these themes?
RD: Yes. Beyond touching base with, you know, the wide variety of the usual suspects, clients, investment teams, external experts, basically we're looking at, on the thematic side of engagement, a range of topics that might evolve, for which the timing is also right to now pick up a new engagement topic. So as an example, we've been engaging on climate change for many years now in a variety of forms in different sectors as well. But one of the new evolving issues or angles around climate change is also the biodiversity one. So here we've, in addition to setting up already a biodiversity-oriented engagement program, we're also looking at this Nature Action 100+ engagement program, which is sort of mimicking the already existing Climate Action 100+ collaborative engagement effort.
EM: Another acronym, the SFDR. So the new regulation, so this and other regulation, how has this played a role in you choosing your engagement themes? And how does SFDR, for instance, influence how you engage?
RD: Well, I'll be open in saying that it's been a bit of a headache, you know, adopting SFDR. I don't think I'm alone in saying that. But in terms of identifying new themes, it's given a bit of regulatory direction for setting specific, well I would say allowing us to set specific thresholds for which we would then engage upon with a variety of companies. I think it's also helped to some extent align, let's say, investment teams and various RI or engagement-oriented teams and activities to really make sure that you're engaging on the basis of some kind of metric within a portfolio. In terms of starting new themes, I don't think it's helped too much. I mean, we've pretty much already had a wide coverage of engagement topics and SFDR is just trying to make sure of that.
EM: Daniëlle, we've spoken a lot in this conversation about the E in ESG. Your focus, your, your professional focus is on the S for social. What's the significance of social engagement for investors?
DE: Well, it's very, very important, but it's also a challenging area. And what you've historically seen is that investors have tended to focus on the E and the G in ESG, so the environmental and the governance part, most likely because there's just more data available and investors love data. It's an easy way of understanding topics and with the S of social, it's sometimes very much more about impact to people or impact on the ground where companies are operating, maybe in jurisdictions that are very far away from where our desks are, making it very much a more challenging topic. There was a recent report by ShareAction that also highlighted that the investment community as a whole generally tends to be very reactive. So there's an incident where the local community, for example, around the mining projects and that's when investors get involved because it hits the headlines. And what we're trying to do is to be more proactive. So we try to talk to companies about how they take human rights into consideration throughout their business operations, preferably before the issues arise, as more a preventative manner. And many companies are obviously working on these issues. It's not new when we come to the table, but we're trying to talk to them about the frameworks that we find important and to make sure that they implement those.
EM: I want to look now at engagement from a different perspective. Could you describe engagement as a potential investment opportunity or even a business opportunity?
DE: Yeah, I think that's definitely what we're trying to look at, right. So on the one hand, we're looking at risk. On the other hand, we're looking at opportunities. And one specific example where we see companies positively influencing and being a positive opportunity for us is really when we're talking about the Sustainable Development Goals or in short, the SDGs. We set up a really extensive engagement program, also linked to an investment opportunity and where we're really trying to assess how companies are contributing to those Sustainable Development Goals, which is really, it used to be something for governments, but it's really also about getting everybody involved to make sure we meet those goals by 2030.
EM: Drawing to a close. What does your daily life look like in the sense of to what extent do you experience collaboration with the other Robeco teams and in particular, collaboration and like really mutual communication between the engagement team and the rest of the SI team and the investment teams.
DE: I think this is really getting more and more important. So really integrating those different worlds, almost. And I think for us, this has been a journey we're on for some years already. So actually, later today, I have a conference call with a company and then there's both people from our SI research team located in Zurich dialing in but also the portfolio manager of the funds that are holding that stock. And I'm providing also part of the analysis. It's really a joint effort where everybody pitches in on the preparation and everybody tries to also share and learn from the outcomes of such a conversation. And set next steps or milestones for the next conversation. So to be honest, it is a real pleasure to work together. It does take a lot of time to coordinate within the organization, but also with outside stakeholders. But you come to a better perspective and you bring together the human rights expertise in my, certainly in my area, but also the sector expertise from a financial analyst, for example, and really understanding that financial materiality, but also that societal materiality.
RD: Yeah, I was going to say that that collaboration is crucial. I mean, if we just look at the broad range of topics that we thematically engage on, you know, whenever we set up such a program, we have to kind of become self-educated experts on that topic. But there's plenty of people within Robeco that are experts in their own right. So I think leveraging that knowledge is also crucial.
LB: Yeah, I know. I can add to that. Although they have said most of what was in my mind. But indeed I think that collaboration is really crucial to make sure that we are learning from each other's focus areas and experiences. And at the end of the day, we're covering similar sectors, similar companies and we can really learn from each other's expertise. So that's why we are on a daily basis, you know, remaining in contact.
EM: Well, it's been a pleasure talking to the three of you, Laura, Robert and Daniëlle. Thanks for your time.
Thank you very much.
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