The buy-side view of ESG
The Global Forum in Paris saw Chris Hollis, chairman of Cliff and head of financial communications at luxury goods giant LVMH, moderate a panel made up of three members of the buy side: Kirsty Collins, global responsible investment at Aviva Investors, Nicholas Melhuish, head of global equities at Amundi, and Marc St John Webb, partner and fund manager at Quaero Capital. They talked everything from ESG and access to the board (below), to the likely impacts of Mifid II (coming soon in the second installment) and even shared some pet hates about IROs (the third installment, also coming soon).
Chris Hollis: We all see our main investors but should we specifically target ESG investors? Do you think ESG is moving more into the general decision-making process?
Kirsty Collins: It is increasingly a differentiator with big investors when they’re winning mandates. [ESG] is becoming commercial, it is becoming something investors are spending money on – in the UK they’re all hiring into their ESG teams – and the focus is much more on integration, not specific products.
[But] markets are different: in France there’s a much bigger SRI business but it’s much more focused on integration. So if you know your top 20 investors, they are all going to have an ESG team. You need to know who the leads are in those teams because they are increasingly talking to your portfolio managers and to your fund managers.
Five years ago they might not have done – they might have been the people down the corridor in cardigans the fund managers never spoke to. That’s definitely changed.
CH: Is the emphasis more on the technical aspects of ESG or on the integration of the ESG strategy within the strategy of the group?
KC: The latter. The first thing you’ve got to demonstrate is how it all fits together. If you can’t tell me the business case for why you’re doing something, you shouldn’t be doing it – whether that’s community investment or your environmental programs – and every ESG analyst will tell you the same thing.
Then you might need to go into a certain level of detail; I wouldn’t expect IR to know that, though it’s no different from any other conversation you might have where you’d pull in your business experts.
Nicholas Melhuish: I think the challenge for all investment firms – us included – is to integrate this. It’s a bit like governance, which has typically been a separate silo, so large investors tend to have a governance team. In the worst way this works, the governance team has nothing to do with the investment managers and you’ve got two separate tracks that don’t talk to each other – that’s very unhelpful in every way and leads to poor engagement and bad outcomes.
ESG is another challenge. My personal view is that ESG is actually incredibly important, particularly the ‘G’ – I really believe in the ‘G’. I think ‘E’ and ‘S’ are very important though the way we measure them sometimes tends to be more difficult and maybe less relevant than traditional investment processes. But I think a traditional, bottom-up investor like me really has to embrace ESG.
How we do it is quantitatively, which makes it very easy to bring into the investment process, so ESG is an intrinsic part of the funds I’m responsible for. When we look at a company, we don’t look at it only because it’s doing well on ESG but if we have two potential companies we might be thinking about investing in – and I run a 30-stock portfolio that we don’t turn over very much – if one company has exemplary governance and another doesn’t and we have a similar upside in both, of course we will always favor the company that has better governance
And it’s for practical reasons: during the time I’ve been running a concentrated global equity fund, the things that have gone badly wrong for us (and when you run a concentrated fund you just can’t have things that go badly wrong – it’s very difficult for performance) have been at companies where governance has been poor. They’ve been poor scorers on governance and when you override that because of the upside, it always comes back to bite you.
CH: From a small and mid-cap point of view, are ESG issues important for you, Marc?
Marc St John Webb: They’re important for us, [but] also very difficult for us. As we are invested in small and micro-cap companies, a lot of those companies don’t have big IR departments and therefore have not embarked on preparing documents that might help us. All the ESG notation companies stop around €1 bn ($1.2 bn) above where we stop so we have to do the work ourselves. It’s a lot of hard work and we would appreciate help from the companies.
[But] the governance side [is something] we’ve always had because we often own 9 percent or 10 percent of a company. You always vote and you always meet with management and you also always need to understand the governance structures within the company, but since we’ve started looking at ESG and filling out ESG notations ourselves, I’m surprised at how much more you can learn about a company you thought you knew well by looking at it from a different angle.
CH: One of the points on which not everyone is in agreement is access to the board on governance matters. What’s your viewpoint?
KC: Governance is not just remuneration – it’s much broader than that and always has been – [but] I think it’s still seen as that. [That said], it’s increasingly expanding into some of these E and S areas if they’re fundamental to how you’re running the business, so risk management and thinking about reputation are – to me – big parts of how governance fits together. It’s much more about how you think about running the company.
It is still mostly about remuneration though because that’s the pointy end of the AGM season. Increasingly, however, I’ve noticed that the board doesn’t bring IR to that conversation.
CH: Could investors meet with the board when you worked in IR at GSK?
KC: Yes absolutely. They own the company. If investors want to meet the board, they get to meet the board. I don’t think you should be able to say no.
NM: It’s not quite that straightforward. It’s not necessarily that easy to get a meeting directly with the board – even in the UK where the channels are clearer than in other systems of governance, and they do vary a lot. The way a German company works, with the aufsichtsrat (the supervisory board), is completely different from the way UK governance works. The Financial Reporting Council has also laid out in the UK how engagement should work with the Stewardship Code and so on. That hasn’t happened necessarily in other markets so that makes the path more difficult.
The US is extremely complicated – not least because you have the mixing of chairman and CEO [roles]. At previous companies where I’ve worked we have been philosophically against that and we have written to every company in the US as a large shareholder and said we think these positions should be split, and they all write back and say, ‘No it works very well for us, thank you very much’.
Personally I prefer the UK way because I think the division of labor between the chairman and CEO is quite clear and you also should have an independent arbitrator in the senior independent director. So if you can’t get anywhere with the chairman because the chairman is in cahoots with the CEO, you can at least have a final right of appeal to the senior independent director.
CH: Should IR be involved in that meeting?
NM: It should certainly be involved in facilitating it and actually I think the IRO should be involved almost all of the time. I think sometimes there are situations where the IRO would be conflicted. If, for example, a large investor has a problem with the way an executive board is functioning and the IRO is reporting to that executive board, you may want to have that discussion without the IRO in the room – but that’s a very extreme example. Generally speaking, the IRO should be involved at all times.
I also think there should be open and free access to the board for investors when appropriate. But – and this is probably politically incorrect – I don’t think all investors are equal. If you’ve been on the register for three, five, seven, 10 years, you’ve engaged with the company in good faith and you want to see the chairman regularly, I think you should be able to. I think if you’ve zipped onto the share register for two weeks because you want to make a quick trade and you want to make a lot of noise, I’m not sure you should have the red carpet rolled out for you immediately.