Once the list of target companies has been defined, investors need to set objectives and track the outcomes of their engagement practices to ensure their effectiveness.
These objectives should be developed by ESG teams in collaboration with investment teams to ensure they are robust and send consistent messages to companies. Examples of objectives for target companies include:
- developing a human rights policy;
- setting up a whistleblowing monitoring system;
- defining emissions reduction targets;
- improving skill-set balance at the board level;
- joining a multi-stakeholder initiative tackling a specific issue; and
- increasing information provided to the market on ESG matters.
|Neuberger Berman, Investment Manager, US||Neuberger Berman prioritised its engagement efforts with non-investment grade pharmaceutical issuers based on:
|PIMCO, Investment Manager, US||PIMCO prioritised its engagement with the European utilities sector based on:
|QIC, Investment Manager, Australia||QIC identified the following material ESG issues as primary objectives for its engagement with an Asian automaker sector issuer:
Investors will find it useful to define milestones and timelines at the start of engagement, although they will need to continuously review these to reflect internal and external developments during dialogue with target companies which often lasts several years. Measuring performance on specific ESG performance indicators and scores is a common way to assess success.
Tracking systems would facilitate record keeping, on a progressive basis, in the following areas:
- interactions (i.e. letters, emails, meetings and on-site visits);
- corporate representatives met;
- information and documentation received;
- commitments from management; and regular assessments of ESG performance.
While this information is usually kept internal and confidential, such systems are useful for preparing reports for clients and the public on the progress and results of engagements. Engagement dialogue can be tracked through tailored, preferably cloud-based, IT systems or customer relationship management (CRM) tools, available across the organisation, from ESG analysts to portfolio managers.
While setting milestones to measure objectives is useful, this might not always be possible for each engagement dialogue and success should always be contextualised; having all milestones covered does not necessarily mean that dialogue cannot be improved. On the other hand, missing milestones might lead to perceived failure and a reluctance by investors to take on difficult issues where progress is not guaranteed or measurable. As a matter of fact, recording the details of an unsuccessful dialogue with a company can be extremely insightful from a ESG integration perspective.
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ESG Engagement for Fixed Income Investors
ESG engagement for fixed income investors: Managing risks, enhancing returns
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Defining objectives and measuring engagement effectiveness