Case study by Etica Sgr, Aldo Bonati
Signatory type: Investment Manager
Operating region: Italy
Assets under management: €3.2 bn (as of 31/12/17)
Why we engage with companies on the SDGs
In 2017, Etica Sgr started linking the issues discussed at AGMs with the SDGs in engagement letters and during dialogue with companies.
The main benefits expected are to:
- identify asks and goals: as the SDGs are linked to specific targets, they facilitate the identification of common company asks and quantifiable targets (e.g. via the Science Based Target initiative in relation to emissions reduction targets);
- facilitate the understanding of the ask: as they require the support of both investors and companies, the SDGs help find a common language on which to base the conversation; and
- enhance engagement effectiveness: as the SDGs are universally accepted, companies see the benefits of acting not only in terms of better risk management and operational efficiency but in improved communication with their audience.
How we engage with companies in general
Etica Sgr performs its engagement activities in line with the Italian Principles of Stewardship promoted by Assogestioni Corporate Governance Committee and the Principles for Responsible Investments (PRI), of which it has been a signatory since 2009.
Etica Sgr’s voting at shareholder meetings is defined by its engagement policy, which is approved by the board of directors upon review by an external independent ethics committee comprising individuals with experience in social, environmental, civil, faith and academic fields.
Engagement is not limited to exercising voting rights; it involves maintaining a dialogue with issuers throughout the year. The dialogue is conducted either independently or in conjunction with networks of investors such as the PRI, ICCR (Interfaith Center on Corporate Responsibility) and SfC (Shareholders for Change).
The engagement process is articulated along the following stages:
- Definition of the engagement policy
- Definition of the engagement plan (annual)
- Analysis and identification of the target companies and engagement asks
- Engagement activity
- Evaluation of the engagement activity (annual)
- Report on the engagement activity (Etica Sgr publishes an annual engagement report)
In line with Etica Sgr’s engagement policy, we choose the companies to engage with based on:
- proximity: we favour Italian companies;
- continuity: we prefer to work with companies with which there is existing dialogue;
- collaboration: we prefer action, motions and initiatives presented jointly with other sustainable and responsible investors (e.g. ICCR, PRI or SfC); and
- controversy: we take into account the presence and severity of any controversial news.
In addition, Etica Sgr considers the following:
- sector: some sectors are more exposed to specific issues, which have a greater impact on the business (e.g. food, automotive and materials in relation to climate change);
- area of operation: some geographies are more exposed to specific issues (e.g. some emerging economies are more exposed to the risks related to respecting human and labour rights); and
- market capitalisation: large companies are typically more exposed to ESG-related risks.
Consequently, Etica Sgr defines an engagement plan annually, identifying strategic and tactical domains in terms of vote and dialogue. The strategic domains for the 2018 dialogue activity were:
- Climate change
- Human rights
- Tax management
- Water management
Each domain is articulated through a set of topics linked to a specific SDG and ask. For example, for the climate change domain, Etica Sgr identified emissions management (four asks linked to SDG 13), climate adaptation (one ask linked to SDG 13) and deforestation (two asks linked to SDG 15). The investee companies are assessed on their exposure to the risks linked to the domains/topics identified and their ability to manage such risks or transform them into opportunities. The result of this analysis supports the definition of the asks.
We assess the results of the engagement activity based on a number of factors and assign a particular engagement a score. The factors include the nature of the ask (e.g. whether related to policy, management or performance), the responsiveness of the company, and the quality of company feedback/action (e.g. whether the company makes a generic commitment or exceeds expectations or how well the company appears to understand the ESG-related risk we engage on). The engagement score guides the next conversation with the company on the same ask (e.g. if a company exceeds expectations, we will not reiterate the same ask and focus on different asks).
Example of SDG engagement
Targets of focus:
- Italian utility company active in electricity (production, distribution, trading and sales), gas (supply, distribution, trading and sales), district heating, waste (collection, treatment and disposal), integrated water cycles, public lighting and other activities, with a strong presence in Northern Italy.
The issue (as per the engagement plan):
- Domain: climate change
- Topic: emissions management (SDG 13)
- Ask: set science-based targets (SBTs) for emissions reduction (SDG 13.2 – to integrate climate change measures into national policies, strategies and planning)
- Etica Sgr identified a gap between company emissions reduction targets, set at 62% with base year 2010, and the SBTs for the utility sector, set at 67% with base year 2013 (targets are calculated differently).
- As the domain, topic and potential impact have been assessed as relevant and material for a company operating in the utility sector, Etica Sgr asked the company to redefine its target in line with the SBT initiative.
- Impact can be measured in terms of emissions savings. The main sources adopted to assess impact will be the CDP Climate Change Questionnaire and the company itself.
- Impact is tracked yearly and measured via the carbon footprint of the equity portfolio, performed annually by Etica Sgr since 2015.
The consequence of the engagement:
The company was responsive and open to dialogue; in April 2018, it formally committed to the SBTs by starting the process to define them.
See: http://www.assogestioni.it/index.cfm/1,815,0,49,html/principi-italiani-di-stewardship (Italian only).
Source: CDP Climate Change Questionnaire 2017.
Source: CDP report, Charged or static: which European electric utilities are prepared for a low carbon transition? (April 2017).