The attributes and skills of company leaders are essential when it comes to investor engagement on environmental, social and governance issues, according to experts.
Company leaders are essential to the growth of the business and its people, and they also play a vital role when it comes to engaging with investors on ESG issues.
When pension schemes and asset managers engage with companies on issues such as climate change and stewardship, the mentality and leadership skills of chief executives are crucial to that engagement leading to successful outcomes.
Ninety One sustainability director Daisy Streatfeild says that when there is senior leadership behind ESG and climate change goals, there is a much easier way forward in the organisation for completing this work.
The more credible a leader is, the more capital they have to be able to drive things forward, the better it is for making progress in your engagement as the providers of capital
Caroline Escott, Railpen
“It also helps staff to understand the importance of having the tools and capabilities to integrate these ESG issues and have that motivation around these issues. This requires resources as well as leadership,” she adds.
Understanding the skills and tone in a leader can really help investors when they attempt to successfully engage on ESG issues and understanding what works and what does not work.
For Newton Investment Management’s chief executive Euan Munro, one of the key roles of a leader is to be a jargon buster and to start clocking in practical terms what ESG means — for example, the relevance of externalities like global warming.
That could mean insurance companies experiencing losses from increased flooding and forest fires, or business models not working because the price of food production has risen.
Being a consensus builder is also important in a leader, says Munro.
“Some people engage with sustainable investing and ESG issues quite quickly because they see them as the right thing to do, while others struggle because they feel it's the role of government to decide whether something's right or wrong,” he explains.
“It's about building consensus across people who are absolutely convinced this is the right thing to do and don't need any other evidence, and the people who need to see the commercial and financial case for it.”
It is also essential for a leader to embed ESG into the business.
“In asset management, we believe that sustainability issues should be embedded into the investment process, and we think companies should do the same. A leader also needs to be a role model who understands that these things matter and that they need to be authentic," he adds.
A leader who listens
A willingness to listen to the shareholders as the providers of capital is also important when it comes to successful engagement.
Railpen senior investment manager Caroline Escott says this is crucial, as well as having a certain open-mindedness and willingness to be receptive to the insights that shareholders can bring from their engagement with other companies and the investee company’s competitors.
“You also want to be speaking to a leader who can influence internally. So, the more credible a leader is, the more capital they have to be able to drive things forward, the better it is for making progress in your engagement as the providers of capital,” she says.
As a long-term investor, Railpen — the manager of the Railways Pension Scheme — engages both individually and directly with companies as well as collaboratively with other investors such as pension schemes or managers, with the aim of trying to influence companies.
With one company, the pension fund has engaged with the chair and CEO separately during the past few months over a number of governance arrangements and their approach to ESG.
“We had suggested that a particular committee structure might make sense for their governance arrangements,” says Escott.
“We were able to have a direct conversation with the CEO and then the chair, and we felt that we were heard by the people who have the ability to make these fundamental decisions. The results have been very positive, and their commitment and enthusiasm were very powerful.”
Change in leadership can help
The importance of senior leadership is particularly noticeable when there is a change at the very top.
Ninety One’s Streatfeild has come across this when there has been new leadership in some the companies such as the oil and gas sector, which she says has “resulted in big change and big developments”.
One example is Bernard Looney, who since becoming CEO of BP in February 2020, has made it a clear priority to address climate change targets.
How schemes and managers can align ESG beliefs
A growing precedent to embed environmental, social and governance thinking is driving asset managers and trustees alike to pursue ways to align views and actions.
“BP has made big steps forward and that tone from the top is setting the agenda. We've seen some real developments for materially changing the course of the company,” she notes.
Railpen also noticed a significant change through its engagement with one of its biggest holdings when there was a change of CEO.
Escott says: “It was interesting to see that there was a much bigger investment in the investor relations team and much bigger investments in individuals who understood what the ESG community was asking for, and were able to suggest that it might make sense for their organisation to implement some of the changes. We have seen culture change as well as improved disclosure.”
