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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As an active manager, I am a long-standing believer in the power of engagement in driving good stewardship. Ongoing engagement is a core element of our stewardship-focused approach, and the numbers speak for themselves — in 2021, we carried out 143 engagements across 95% of the holdings in our Global Stewards strategy. Below I share some of the insights we have learned over the years.
Companies that are the most adept at balancing their impact on people and the planet with the pursuit of profit can, in our view, build a long-term advantage. As a team, we strive to invest in these “good stewards” because we view stewardship and investment returns as intertwined. Pursuing high standards for governance and sustainability practices can enhance resilience and profitability over the long term.
We believe that regular conversations with management and boards enable us to assess a company’s corporate culture, adaptability and responsiveness and ensure that incentives are aligned with sustainable long-term targets. Above all, regular dialogue allows us to hold management teams and boards accountable for their actions.
We prioritise engagement on the material issues that are most likely to have a financial impact on companies or affect their operations, such as talent diversity, modern slavery in supply chains, building resilience to physical climate risks, and establishing targets to reduce greenhouse gas emissions and mitigate climate transition risks. We also seek to understand companies’ long-term strategy and share our views on material topics such as capital allocation, risk management and ESG, as well as focusing on issues related to ethics and corporate culture. In my view, the strong links between stewardship and return on capital over the long term make ESG factors a particularly important area for active engagement to influence a company’s long-term success.
As active managers, I think engagement gives us a valuable opportunity to supplement our knowledge about the companies we invest in and enhance our influence over their long-term success. Our engagement focuses on gaining differentiated insights, assessing and influencing the risks and opportunities facing a company, encouraging transparency improvements and influencing behavioural changes that we believe may impact the future profitability and resilience of a company.
To maximise the impact of engagement and drive value for companies, I believe it is critical to be able to act as a credible and informed partner for boards and management teams, bringing a wide range of perspectives and insights to the table. In our case, we greatly benefit from Wellington’s collaborative culture and the cross pollination of ideas between our specialist investment, research, stewardship, proxy voting and ESG teams.
Successful engagement, in my view, also means taking a genuinely long-term approach. Companies are complex organisations, and they need the necessary time to put in place long-lasting changes. Our long-term investment approach — we seek to hold companies for 10+ years — gives us greater ability to raise awareness of issues that are important to us as fiduciaries of our clients’ assets and to influence change.
This patient approach should, however, be coupled with clear accountability. In our portfolios, we aim to actively use the voting rights we hold on our clients’ behalf to express our views to the board and hold them to account on material topics. If escalation through private engagements proves unsuccessful, investors may consider using public engagement tools such as voicing concerns on an engagement topic in the press or through a letter-writing campaign with other shareholders. From our perspective, we believe building a constructive but candid partnership with the companies in which we invest delivers the best long-term results, so we carefully weigh any decision to engage publicly on a case-by-case basis. In certain cases, I think it is also important to recognise the limits of engagement, and being an active manager gives us the option to divest where we believe our engagement has ultimately been unsuccessful.
I think it is important to recognise that companies operate within a specific context. While we have a clear set of engagement priorities, we tailor our approach to engagement, recognising that each company faces a unique set of challenges and respecting different cultural and social norms. In our approach, we can lean on our career industry analysts across equity, fixed income and ESG research, who bring extensive knowledge of their industries and long-term relationships with management and board members. Further, to facilitate assessment, we group companies into six broad sectors that we believe have similar ESG priorities (Figure 1): consumer; financials; health care; industrials; power; and technology, media and telecoms. For example, in the consumer sector, our engagements focus on adaptability, conduct and reputation, customer satisfaction, product safety and supply-chain management. In addition, we use a proprietary “scorecard” to help us compare companies in an “apples-to-apples” way through our engagement.
For illustrative purpose only. This is not an exhaustive list of stewardship issues. A decision to invest should take account of all the characteristics and objectives described in the offering documents. Please refer to the sustainability-related disclosures for information on the commitments of the portfolio.
We hope that sharing Wellington’s insights and research helps companies to navigate the increasingly demanding list of risks that management teams and boards are now facing. Equally, developing strong relationships with companies through regular engagement gives us the opportunity to champion and support long-termism and challenge insular thinking.
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