As responsible and sustainable investors, engagement with companies is one of the most important aspects of our work, and the one which can result in the most profound real-world impacts.
Every year, the EdenTree Responsible Investment team chooses new engagement themes to focus on for the year ahead. In the past three decades of engaging with companies in our portfolios, it has proved a powerful way of improving investee companies’ performance on a range of environmental, social and governance topics. Engagement is conducted with investee companies in which we hold equities or bonds, and is conducted both unilaterally and collaboratively with like-minded non-governmental organization (NGO) and investors. In 2021, we conducted hundreds of engagements across a broad range of pressing sustainability topics.
Our engagement priorities for 2022 are explored below:
Climate change has been a core thematic engagement for many years, and our focus is on encouraging companies to set Science Based Targets (SBTs). SBTs provide companies which a clearly defined path to reduce emissions in line with what the latest climate science deems necessary, ensuring alignment of decarbonisation efforts with the goals of the Paris Agreement.
As well as a focus on absolute emission reductions and SBTs, we recognise the transition to a low carbon economy needs to be people-centred, just and inclusive. With this in mind – and highlighting the importance of not considering E, S and G issues in silos – our engagements on climate change will include a focus on the social impacts key to ensuring a just transition.
A final area of priority on climate change is a sectoral focus on Banks. As a house which does not invest in oil and gas, our highest exposure to fossil fuels is a result of the banking sectors financing of fossil fuels. This topic has been part of our thematic engagements for four consecutive years, and we will continue to engage with banks, both unilaterally and collaboratively as members of the Institutional Investors Group on Climate Change, to withdraw from projects that fail to meet the Paris Agreement goals.
We are cognisant that the E in ESG reaches well beyond climate change, and with this in mind we have two further topics of focus for 2022: biodiversity and water. Our focus on biodiversity follows a wide-reaching engagement we conducted with 20 holdings across construction, forestry and food retail sectors on the topic. Using our learnings from this engagement, we will continue to push for best practices in natural capital management across all sectors. Lastly, following a number of decades of extremely poor environmental performance by UK water utility companies, we are kicking off an engagement with eight UK water utility companies on the topic of river quality and pollution management in England & Wales.
Given the social and economic disruption caused by Covid-19, we consider workforce-related issues to be more pertinent than ever. At EdenTree, we have long campaigned for the Living Wage, believing it is one of the most important things a company can do to contribute to a more just and equal society. This focus will continue in 2022, both in our own engagements and as part of ShareAction’s Good Work Coalition.
This year marked the 10-year anniversary of the adoption of the UN Guiding Principles on Business & Human Rights. With this in mind, the protection of Human Rights – both in company’s direct operations and across their supply chains - will be another core focus this year. This includes a focus on Modern Slavery, conflict mineral supply chains, and the increase in digital risks associated with the adoption of new technologies such as Artificial Intelligence.
Lastly under the social banner, we are planning to conduct an engagement later this year with our holdings across the financial services sector on the topic of financial inclusion. An estimated one in four adults will experience financial exclusion at least once in their lives, many being denied access to credit and being forced to rely on ‘doorstep’ loans. Financial inclusion of the most marginalised remains unresolved and is, in our view, a pressing ESG issue.
EdenTree supports the targets of the Hampton-Alexander Review and Parker Review, and as with previous years diversity will continue to be a focus of our engagement activity in 2022. Where Boards lack gender or ethnic diversity in line with these goals, we will engage to understand the steps they are taking to rectify this (in addition to considering voting against the re-election of the Chair of the Nominations Committee).
In 2019 we began a thematic strand of engagement with AIM listed companies with the objective of raising Governance standards, which saw a number of companies targeted move to annual director elections or put executive pay to vote. Given the success of this engagement, we will continue engaging with our AIM listed holdings to raise governance standards.
We have long engaged on executive remuneration, and executive pay accounts for the majority of voting action taken. We have a detailed framework on executive pay, and find it very challenging to support pay packages in the FTSE100 where we view the majority to be excessive and oppose over 90%. Where we vote against remuneration, we also seek to engage with the Board to encourage changes.
Lastly, we are expecting a growing number of company climate resolutions at the 2022 AGM season, as well as a rise in “Say on Climate” votes on AGM agendas. We will consider each proposal on its merits, with a view to supporting where these are informed, detailed and clearly set out intermediate milestones and targets.
Collaborative engagements are key to wider progress on environmental, social, and governance issues, by leveraging the collective voice and expertise of like-minded investors and other stakeholders to drive change. As with previous years, we work with a number of organisations to further the impact of our engagement activity such as ShareAction, IIGCC and the PRI. Among other collaborative initiatives, we will continue to push for better corporate disclosure on ESG issues through our annual participation in the CDP Non-Disclosure Campaign and the Workforce Disclosure Initiative.
For updates on our engagement work throughout the year, look out for our quarterly RI Activity Reports!