Active engagement in ESG: Why it matters

The principles behind ESG need to be embedded in an investment framework which encourages positive change. Engagement is an important part of our investment process and is particularly well suited to highlighting ESG concerns. Coupling this with a focus on valuation is, to our minds, the best way to deliver strong investment outcomes for our clients over the long term.

Our focus as active fund managers is on finding mispriced stocks. We are open to buying companies whose qualities and future potential are not properly reflected in their share prices. Equally, we are open to buying companies whose willingness and efforts to change have yet to be recognised by the market.

The same principles apply to how we see ESG: many of its key aims and principles are well aligned with our long-term investment focus and engagement with the companies we own. Therefore, ESG analysis is fully embedded into our investment process rather than being viewed as an add-on.

Exclusion vs Inclusion

We will not automatically sell or exclude companies where we see ESG risks. As investors, we need to be forward looking rather than backward looking. We are therefore open to investing in companies with sub-optimal ratings but where we can identify a clear path to change.

This inclusive approach is key to our process as it helps us to better understand ESG risks and crucially, identify opportunities too.

Active analysis

Getting to the right answer involves more than just focusing on information provided by the ESG rating agencies. They provide some useful insights and information, but their analysis almost exclusively focuses on the negatives as these are usually easier to quantify. The opportunities, by their very definition, are ahead of us, so are much harder to assess. 

Rather, we will draw on our own knowledge, as well as relevant analysis from our global ESG team and ESGintel (proprietary ESG ratings system), to provide a basis for further research. In our experience, most ESG issues are rarely as black and white as ratings would have us believe. Life just isn’t that simple. This is where an active approach can truly pay off.

Active engagement

The real value-add we offer as long-term, active investors is our level of engagement with companies.

We have access to boards and senior management and can use our AGM votes and engagement to assert influence. At the same time, we can bring to bear our views on a wide range of subjects, particularly in areas where the data alone struggles to make a judgement.

For example, in 2020 alone the European equities team had 215 company meetings where ESG was discussed, and a further 32 that were dedicated solely to ESG topics.

A better investment outcome and greater progress towards achieving ESG’s basic aims may well be achieved by backing companies that have improving ESG momentum, as opposed to purely focusing on companies who are already there. Engagement and dialogue tend to generate better results than exclusion and divestment.

Example – Austrian energy company

A recent example to illustrate just how powerful engagement can be is best demonstrated in our interactions with an Austrian energy company.

Invesco, in combination with Erste, are the two co-lead investors working directly with the company in the pursuit of the key Climate Action 100+ group targets. Building on a previous one to one interaction with the Chairman in 2019 – in which the company has responded positively by introducing various measures - the Invesco ESG team have been proactive in ensuring their climate strategy continues to evolve further.

In Q3 2020, the Invesco ESG team provided detailed feedback to the company on their first lobbying report and held two constructive engagement meetings where we were able to ask clarifying questions but also state the ESG evolutions that Invesco are looking for.

Conclusion

We believe that our approach is honest, coherent and pragmatic. Correctly anticipating change for good and the scope for market perceptions to catch up with reality can often generate strong investment returns. The important part is identifying the issues and understanding the path to improvement.