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What is engagement and how does it work?

The alternative to selling is staying invested in a company and encouraging change through engagement.

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Ethical investing has moved from being fringe a decade ago to mainstream today. With ethical investing, there are different approaches and different terms used, leaving many investors not knowing where to turn.

In this column we want to demystify things by answering readers’ queries. This week’s questions come from Lily.

Question: If I’m invested in a harmful company, what can I do, just sell?

There’s no such thing as a perfect company satisfying everyone’s ethical views around care of staff, environment and communities. Tesla’s car batteries may have questions around sourcing raw materials. Tobacco products are legal but also responsible for health issues and deaths. Consumer goods companies like Unilever and Estée Lauder can test products on animals.

Selling means your savings are no longer invested in the company. If you (or your KiwiSaver) bought the shares through listed markets, then you’ve bought the shares from someone else. Selling the shares will be better for your conscience, but won’t deprive the company of capital.

However, if many people sell, including large investors like university endowment funds worldwide (and locally Auckland, Otago and Victoria), it sends a powerful signal about the need for change.

Individual investors may feel they make no difference, however we’ve seen this year with ‘meme’ stocks like GameStop that individual investors can collectively have huge influence.

Some argue that investors selling forces the share price down, letting other investors buy a bargain. That looks sensible in theory, yet the data tells us five-year returns for oil, coal and tobacco companies range between poor and mediocre.

The alternative to selling is staying invested in a company and encouraging change through engagement.

Question: What does engagement with a company look like?

KiwiSaver managers own shares in hundreds or even thousands of companies on behalf of investors. If a company creates harm or its behaviour is unacceptable, then it’s possible for the KiwiSaver manager – or for any investor – to encourage change.

The starting point is to exercise votes as an investor. Shareholders can put forward resolutions to be voted on, giving shareholders a say (even where the company’s board doesn’t want it). This year, US listed oil company Chevron was shocked when 60 per cent of shareholder votes were in favour of the company working harder to reduce emissions.

Another step is to vote new directors onto a board. It’s tricky and requires a number of shareholders to collaborate. Remarkably, earlier this year a small activist US hedge fund managed to have directors with renewable energy experience voted onto ExxonMobil’s board. The company was stunned, but it will bring change.

The most common way for fund managers to engage with a company is to ask questions or demand change from the board or management. It could be about adopting science-based targets for carbon neutrality, risks around forced labour in the supply chain, animal testing or even the need for a change of leadership. Last year, shareholders in mining company Rio Tinto forced the company’s chief executive to resign after the destruction of Aboriginal sites.

Engagement can create change. Alternatively, a KiwiSaver manager may decide engagement won’t influence the company, or change may be too slow, in which case the answer is to sell.

You can ask your KiwiSaver manager how they engage or divest (sell) what they see as ‘harmful’ companies. You can ask them about why they hold specific companies. If money is invested on your behalf, you’re entitled to check that your fund manager’s thinking aligns with your values.

– John Berry is co-founder and Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth.

(This article was originally published by Stuff September 23, 2021)

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