Global asset manager BlackRock and sustainable investing advocates Ceres have produced a framework and methodology for institutional investors on engaging companies and policymakers on sustainability issues.

The 21st Century Engagement Guide covers elements of strategic communication including developing an engagement plan and formal written communications, as well as strategies for the shareholder level including proposals, resolutions and engagement through proxy votes.

There is also an outline of mechanisms beyond the board level, including influencing public policymaking, the value of stewardship schemes and the question of divestment.

Catherine Jackson and Pieter van Stijn from Dutch pension fund PGGM, which bases its criteria for divestment on the United National Global Compact principles, said, “One of our functions and indeed, responsibilities, is to use our rights as shareholders to engage with companies we invest in when we see room for improvement in the way companies manage critical ESG risks and opportunities.

“Such engagement activities are intended to deliver a demonstrable change in the behaviour or activities of a company with which dialogue is conducted. If companies are unwilling to enter sufficiently into a meaningful dialogue with PGGM or do not adjust their behaviour or activities in the desired direction, PGGM can opt to discontinue its investments in these companies. As such, divestment is expressly seen as a last resort.”

In an article on the Australian situation, Gordon Hagart and Edward John from the Australian Council of Superannuation Investors state that “ESG issues can be drivers of financial risk and return for long-term investors, while the price-setting market and its agents can be short-term in outlook and poorly aligned with upstream asset owners”.

They estimate the long-term capital in the Australian pension and superannuation funds pool to be $1.7 trillion dollars as of June 2014, and while capital markets are not always well set-up in ways that are optimal for providers of long-term capital, asset owners are well-placed to “influence the rules of the game”.

While in this market environment, social and governance issues are regarded as long-term investment issues rather than tick-the-box or compliance issues, there has been a growing trend toward collaboration between investors with similar goals as the cost of obtaining ESG information and exercising ownership rights can be high.

A critical issue identified in terms of areas where investors need to be focusing engagement with companies is diversity, including but not exclusively gender diversity, on corporate boards.

“In the case of board refreshment, this will require a broadening and deepening of the director talent pool, as well as leadership and more imaginative and meritocratic nonexecutive director recruitment processes. Similarly, there is a need at many companies to improve their ability to develop their management talent organically to facilitate effective succession planning at the highest levels.

“We expect shareholders to put boards and management under significantly more scrutiny on these aspects of their responsibilities and hold accountable those who are failing to act swiftly enough.”

  • Download The 21st Century Engagement Guide and its supporting documents, including proxy voting guidelines for Australia, New Zealand, Europe, Asia, the Middle East, Canada and Latin America.