In addition to cultivating portfolios aligned with issues involving the environment, society, and governance (ESG), shareholder engagement is an important way for impact investors to bring about positive change.
According to Novethic, a French research institute focused on a sustainable economy, shareholder engagement can loosely be defined as an investor “taking a stand on ESG issues and demanding of the companies it targets that they meaningfully improve their practices.”
Activist shareholders have a number of avenues to engage companies on ESG issues. They can participate in proxy votes on annual meeting agendas or petition companies to add ESG resolutions to annual meetings. They can write letters to companies’ investor relations departments or have in-person meetings with senior executives or board members. If issues are determined to be unresolvable, they can sell their shares of companies that refuse to listen or appropriately respond.
Corporate governance solutions firm ISS Corporate Solutions argued that the increased communication resulting from shareholder engagement aids both shareholders and companies. “Being in regular contact benefits both parties by facilitating a better understanding of the company (for shareholders) as well as the views and policies of its institutional shareholders (for issuers),” said ISS. “If the only time your company reaches out to shareholders is when something bad is happening or about to happen, you can expect them to be wary to engage with and support you.”
Here are five examples of how shareholder engagement has pushed forward ESG principles.
1. Climate change is now on the agenda of many company boards. CalPERS, the California public pension investor, changed its corporate governance principles so that board members of the companies it owns should have expertise and background in climate change risk management. Both Shell and ExxonMobil have agreed to activist resolutions requiring them to report on risks from climate change.
2. Water scarcity is being openly discussed at company annual meetings. For many companies, water is a long-term risk and needs priority at the corporate strategy level. Large corporate users of water are devoting more time and resources to water management as a result of shareholder efforts.
3. Human rights violations are also being targeted by shareholders. Shareholder proposals from the American Federation of State, County and Municipal Employees Pension Plans have been addressed at annual meetings for Halliburton, McDonald’s, and Caterpillar, requiring the companies to conduct human rights due diligence to assess risks related to their business in countries like the Sudan.
4. Activist shareholders are focusing on political spending by companies to ensure that lobbying doesn’t encourage adoption of legislation that runs counter to ESG principles. Lobbying disclosure resolutions are garnering increasing institutional support, said the Interfaith Center on Corporate Responsibility (ICCR).
5. The ICCR also noted that global health has become an issue of concern for engaged shareholders. Activists are pressing pharmaceutical companies to make their patents on HIV/AIDS medicines available to the Medicines Patent Pool, which facilitates the manufacture of generic versions of branded drugs. At least six firms have placed drugs in the pool.
When shareholders commit to and advocate for a certain cause, the result can be sweeping changes in corporate policy and practice. While the shareholders of yore tended to take a more passive approach, according to Forbes, these examples show the value of staying engaged and having conversations with companies about ESG values.