NordSIP Insights
Systematically sustainable – 
ESG Integration in Quantitative Processes
15 June 2018

Impact through engagement

 featuring Tytti Kaasinen, Head of Stewardship & Risk Engagement at GES

SDGs as a tool for engagement

Kaasinen returns to the core of her experience and shares insights into how to use SDGs in the context of engagement. But first, she elaborates a little about the way GES structures its engagement work.

“We have two kinds of approaches,” she explains, “The first one is our traditional approach: norms-based, or screening-based, which means that we identify companies that are associated with some wrongdoing or breach of international norms in any areas related to ESG. We then engage reactively in order for the companies in question to both rectify the situation and strengthen their practices to mitigate the risk of getting involved in a similar incident in the future. The other approach is proactive where the company hasn’t necessary been reported as doing anything wrong, but where we identify hot topics and material ESG issues that companies and investors should be aware of and managing before things get too critical. We choose an angle that makes sense from an investor and company perspective. Based on that topic, we select focus sectors and companies that we believe should be preparing for certain risks, or adapting to capture opportunities. As we represent investors, we want to ensure that the companies are well prepared in advance, instead of running their operation with a higher risk or postponing action until after they face setbacks.”

“In both the reactive norms-based approach and the thematic, proactive one, we have been mapping our existing engagements against the SDGs to be able to show better how what we do on our clients’ behalf contribute to the SDG agenda and to enable clients to know which SDGs they are supporting through our work. We also utilise the SDG framework to make sure that we are choosing relevant hot topics in our proactive efforts. We want to propose something that is in line with the comprehensive ESG challenges the world has collectively identified and decided to focus on. As we interact with companies and collaborate with our clients, we can contribute to this mutual framework. By using the SDGs to map our efforts, we make sure that we help reinforce and not accidentally contradict any parts of the SDG agenda, so that we can help achieve the right kind of impact.”

Engaging in a systematic way

Nydahl goes on to explain how his firm uses GES’s services. “For us, engagement is an important aspect of what we want to achieve. We realised early on that it would be more beneficial to use outside expertise to cover this area, so we decided at an early stage to engage with companies through GES. We aim to be systematic in our approach to engagement as well, even though GES’s input is more qualitative in nature and involves a lot of human legwork. We have an ESG committee, of which Tytti is a member. From the start, the CEO or deputy CEO of IPM have been on the ESG committee. We believe it is important that management shows direct involvement in our ESG work. The committee meets on a regular basis, and among other things we go through GES’s engagement lists

If a company is on the engagement list and they do nothing to improve for a year, then we exclude them from our portfolios. We, as in IPM, send them a letter, saying that we have been watching them closely, and that they have been excluded. We also send them a letter if they are re-included. It is worth noting sending a letter regarding a re-inclusion is not a very common practise among asset managers. A large US-based technology company once sent us a thank you note, saying that it was the first time they had heard any positive feedback. That is possibly a lesson for all of us. It is easy to complain about what companies do not do, but when they improve perhaps we should also make sure to let them know.”

“In our investment process, engagement becomes digital. Here again, it is critical how we integrate this type of data into our quantitative process. Values for engagement in the model are set either to zero or one, depending on whether a company is included or excluded. When a company is excluded, our process finds a ‘bestin-class substitution’, so that the portfolio maintains the same risk profile as if the position had not been excluded. This goes for norm-based as well as engagement-based exclusions.”

Stronger together

For Smith, one of the keys to successful engagement is the ability for investors to act in concert. “It is hard to get away from the fact that engagement is a resource-intensive activity. At Rosenberg, we are fortunate that AXA Investment Managers have a dedicated team engaging with companies. We also benefit from having a parent who is interested and engaged, and an ‘activist’ in their own right. We also work together with other investors where appropriate. It is important that we look for those opportunities to work together, where interests are aligned.”

Kaasinen supports Smith’s arguments for collaboration and elaborates on the risk that individual engagement could potentially generate. “Collaboration is important and impactful at the same time. Individual investors might lack resources, expertise, or leverage to influence companies. However, coming together, combining assets under management, expertise and resources opens up a world of opportunities and allows for better results. This is relevant not only on a practical level but also to ensure that messages and intentions are aligned. When talking to companies separately, how do investors make sure that one is not asking something, and another is asking something else, so that the company is caught in a cross-fire trying to please everyone? That would be messy. It is essential that the investors have some understanding or mutual view of what is desirable and what the priorities are. Engagement should not cause any harm or hinder the company in the management of these delicate issues.”

Behind the scene: addressing PR issues

Beyond the debate of whether engagement enhances financial returns or only satisfies an ethical requirement, Tyszkiewicz brings up another important point that often remains behind the ESG scene. “Engagement from our clients’ perspective is very size dependent. We have some larger clients such as the Swedish state pension AP7 for example, who are quite happy to catch a plane and go and sue Facebook. That is perhaps not quite typical for our clients, but it does happen. Most of our clients want to outsource engagement, as it is a labour-intensive job, as it has been already mentioned. The crucial point we hear from every single client is a need to know what is going on. They want to know very quickly from their fund managers or their data providers if there is anything in the portfolio that has an issue, so that they can prepare an appropriate answer. That is another thing that is not so often associated with ESG. Most investors will say they choose to integrate ESG because of altruism or to save the planet, or increasingly for financial reasons. Behind the scenes, however, lies the PR risk. It is crucial for large pension funds to avoid reputation-damaging headlines. Managers and data providers should, therefore, remember to get on the phone immediately if something happens, to enable their investor to answer the question that they are inevitably going to receive from their members or the press.”

 

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