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How active ownership plays a role in ESG investing

A close up of two business people shaking hands

ESG investing means considering environmental, social, and governance factors when investing, as well as the usual factors such as risk and how an investment fits into your portfolio. Active ownership is one way investors can incorporate ESG into their portfolios.

When you think of how to implement ESG investing, you may think about excluding certain stocks. This could mean avoiding companies that operate within certain industries or excluding companies because their social practices don’t align with your beliefs. This is known as “negative screening”. While a popular ESG strategy, it’s not the only option.

Alternative ESG strategies include positive screening, where you actively invest a portion of your investment portfolio into stocks that match your ESG criteria, and active ownership.

What is active ownership?

Active ownership means using your shareholder rights to influence a company’s behaviour. This could mean voting at a shareholder meeting or engaging with companies that you’re invested in. It can be an effective way to encourage businesses to consider a range of ESG issues and change their practices.

By becoming a shareholder in a company, an active ownership strategy can hold companies to account and exacting change. As this method relies on shareholder power, it’s often more effective when it’s carried out by institutional investors, such as pension funds, or cooperatively.

Does active ownership work?

Results from active ownership can take time and long-term relationships to deliver change, but it can be an effective way to instil ESG practices in businesses

A recent example of active ownership occurred at last year’s COP26 climate conference in Glasgow. According to ShareAction, 115 investors, representing $4.2 trillion (£3.17 trillion) in funds wrote to 63 banks, including JPMorgan Chase and Deutsche Bank, calling on them to strengthen their climate and biodiversity strategies. As investors representing significant assets, these demands can encourage behaviour that considers ESG criteria. Those that fail to respond could face challenges from some of their shareholders at their next annual general meeting.

In May 2021, an investor coalition representing £140 billion in assets led by ShareAction demonstrated the power active ownership can have. Following engagement with seven institutional investors, Tesco committed to increasing its sales of healthier food and drink products across all of its group retail businesses. By 2025, the supermarket has committed to increasing its share of healthy products from 58% to 65% of sales.

ShareAction’s Healthy Markets investor coalition engages with companies to promote public health and sustainable growth. Obesity costs the UK £54 billion each year in lost earnings and profit, and about 10% of the national health budget is used to treat related diseases. So, by engaging with Tesco, the coalition could be the catalyst for positive change.

The organisation notes that by embracing this change, supermarkets can seize opportunities too. Increasing regulation to reduce obesity and unhealthy lifestyles in the UK and shifting consumer preferences mean supermarkets that embrace healthier options could be more secure, and so more profitable in the long term.

Can individual investors use active ownership to encourage ESG changes?

As mentioned above, active ownership works best when investors with significant stakes in a business demand change. As a result, it’s typically a strategy for institutional investors, but that doesn’t mean you can’t be involved as an individual investor.

Investing through institutional investors that use their shareholder power is one option. Your pension provider, for example, is likely to have significant assets under management, which could mean it has the power to use its ownership to encourage ESG practices.

One of the challenges for individual investors is accessing and understanding the information from institutional investors that show how they’re using their shareholder power. However, as active ownership and ESG become more popular, institutional investors are making information more accessible.

Legal & General, for example, offers a report that shows how they’ve used their shareholder power. In 2020, the institutional investor says it opposed 4,700 director elections due to governance concerns and voted in 66,037 resolutions worldwide. It also showcases some case studies that demonstrate how it has engaged with companies on a range of issues. In 2020, these included engaging with Facebook about privacy and with Boohoo on modern slavery and fast fashion.

If ESG is something you want to consider when investing, there are several ways you can do this. It’s also just as important that you balance investment decisions with your own goals and risk profile. We’re here to offer you guidance and support, so please contact us to talk about ESG investing and the steps you could take to embrace it.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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